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House prices rise but 'slow drift down' forecast

House prices edged higher in 2010 but are still expected to drop in the first half of 2011, mortgage lender Nationwide said today.

The average price of a home in December was 0.4% higher than a year ago, at £162,763, buoyed by its first monthly rise since May.

But Nationwide warned that prices, which have declined on balance in the second half of the year, will continue to fall in the first half of 2011 as demand remains weak.

Nationwide chief economist Martin Gahbauer said: "At the moment, there are probably still too few buyers chasing too many properties.

"As a result, the slow drift down in house prices is likely to persist in 2011, at least for the first half of the year.

"Whether it continues into the second half will depend on the flow of new property on to the market."

Although prices rose 0.4% month-on-month in December, the longer-term picture was one of modest decline, he added.

The quarter-on-quarter figure, which is a more stable indicator of house price movements because it averages out monthly fluctuations, was down 1% compared with 1.3% a month ago.

"Despite December's increase, house prices have fallen in four out of the last six months and it would be premature to suggest that the recent downward trend has been broken on the basis of one month's figures," he added.

House prices lost most of their gains from the first half of the year as mortgages became more difficult to secure and the coalition Government's decision to scrap home information packs (Hips) caused an increasing number of properties to be put on the market, he added.

The current downward trend was very slight compared to the depths of the recession in the second half of 2008 when the quarter-on-quarter rate of change dropped as low as -5.5%, he added.

But Mr Gahbauer warned that house prices could show greater declines if the Bank of England decided to raise its interest rate above its historic low of 0.5% earlier than he expected next year.

"On balance, a relatively stable picture, with the possibility of a small price decline, appears the most likely outcome for 2011 at this stage," he added.

"However, the experience from 2009 - when house prices were widely expected to see a large fall and then ended up rising by 6% - illustrates the uncertainty of the outlook and shows that anything is possible."

Nationwide's data showed house prices fell in all regions of the UK in the fourth quarter, apart from East Anglia, the north of England, and Scotland.

East Anglia saw the biggest quarterly gain at 1.6%, but prices dipped by 3.4% in Northern Ireland, meaning they are now 45% from their 2007 peak.