Economic News

LONDON (ShareCast) - A drop in house prices in June has broken a four-month run of rises, although the annual rate of decline narrowed as buyers snapped up bargains.

Prices fell 0.4% this month from May when they rose 2.4%, according to Rightmove (LSE: GB00B0MFTM73.L - news) , taking the average asking price down by £1,000 to £226,436.

"The hesitation in asking prices after four consecutive monthly rises appears to highlight that, while new stock remains in short supply, new sellers are having to vary their prices to match local buyer demand," the property website said.

But prices are still up 6% since the start of the year due to a shortage of saleable property. The year-on-year drop improved to 5.5%, better than last month's 6.2% fall.

"For the equity-rich, 2009 has turned out to be the year of the property deal," said Miles Shipside, commercial director of Rightmove. "Those with a good deposit and a stable job are now finding they can afford a better property than two years ago."

Shipside points out that prices are likely to recover more quickly in the south of England, where the number of new sellers is down over 45% on a year ago versus 40.1% for the rest of England and Wales.

He says the potential for future rises is especially marked in Greater London as the supply of new properties is down 52.3% so far this year versus the same time in 2008.

But Rightmove warns that as demand recovers, lenders are likely to ration mortgages by raising interest rates and asking for large deposits due to limited funds.

"Unless the markets for wholesale mortgage funding re-open, volumes will remain muted due to a distorted reliance on equity-rich buyers," it says.

Rising rates will give first-time buyers, crucial to any recovery in prices, less chance of getting a foot on the ladder. "Lenders need to be wary not to choke off the recovery in affordability and activity by punishing the returning buyers with ever widening margins," Shipside warns.

Howard Archer, chief UK economist at IHS Global Insight, thinks house prices will fall another 10% from current levels to trough around mid-2010, although he admits this could be too pessimistic if the economy continues to improve.