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(RTTNews) - U.K. house prices dropped more than expected in August as the imbalance between supply and demand in the housing market increased, according to Nationwide. However, the lender said the current fall in house prices was "not an unhealthy development."
House prices fell 0.9% compared to July, faster than the 0.5% decrease in the previous month. Economists had forecast a 0.3% drop.
The average price of a U.K. home is now just over GBP 166,500. This marks the first time house prices have dropped for two straight months since February last year.
"Recent market trends remain consistent with an unwinding of the supply-demand imbalance that drove up prices for much of last year," said Nationwide chief economist Martin Gahbauer. "As more sellers have returned to the market, buyers have a greater selection of properties to choose from and more bargaining power with which to bid down asking prices."
But he added there was little evidence of distressed selling, with the number of mortgage arrears and repossessions falling in the June quarter. "As such, the current period of price declines is likely to remain relatively modest. Given that the price increases of the last year had gotten ahead of the recovery in the wider economy, the current correction is not an unhealthy development," said Gahbauer.
On a year-over-year basis, house prices were still up 3.9%, sharply lesser than the 6.6% increase in July and the 8.7% rise in June. Economists had forecast a 4.9% rise.
The quarter-on-quarter rate of change, which is seen as a more smoother indicator of recent price changes, was flat in August, compared to a 1.2% increase in July.
Nationwide's data follows figures released earlier this week by the Bank of England, which showed mortgage demand retreated sharply in July. Mortgage lending increased GBP 0.1 billion, well below the June increase of GBP 0.5 billion.
"Housing market activity is currently low, the economic fundamentals are far from ideal for the housing market, a major fiscal squeeze is getting underway, and house price to earnings ratios have moved up," said IHS Global Insight chief economist Howard Archer. "On top of this, credit conditions remain tight with mortgages still hard to get for many people."
Exacerbating falling demand, Archer added, was rising supply, tipping the supply-demand balance firmly in favor of buyers. The economist forecast house prices to fall back by 3-5% over the second half of the year, although he said a sharp correction was unlikely.
"It is hard at this stage to be optimistic about house prices in 2011 as the fiscal squeeze will increasingly kick in, which will hit people's pockets and lead to serious job losses in the public sector," Archer said. He predicted house prices to be at least 10% lower at the end of next year, compared to current levels.
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