House prices slip again as market faces stagnation

House prices are "stagnating" and seem likely to fall over the next few months, according to the Nationwide building society.

The news – which implies hundreds of thousands more home owners drifting into negative equity – comes at a time when many experts are predicting that house prices will fall in real terms to 2003 levels by 2015.

The latest survey from Nationwide shows that the value of the average British home fell by 0.9 per cent in August, leaving the typical property worth £166,507. It is the third successive month of decline, wiping £3,604 off the value of the average home.

The Nationwide says that, abstracting monthly volatility, "house prices have essentially stagnated over the summer". It warns that "unless house prices bounce back strongly in September, the three-month rate of change will turn negative next month".

Martin Gahbauer, Nationwide's chief economist, said: "Recent market trends remain consistent with an unwinding of the supply-demand imbalance that drove up prices for much of the last year. As more sellers have returned to the market, buyers have a greater selection of properties to choose from and more bargaining power to bid down asking prices."

"The current period of price declines is likely to remain relatively modest," he added.

Nationwide's data adds to other evidence suggesting a faltering market, if not a crash. The "leading indicators" are unpromising, it says.

Mortgage approvals, according to the Bank of England, are running at around half the levels that would underpin a sustained rise in valuations, despite the stamp duty holiday for first-time buyers of homes worth up to £250,000.

In the first seven months of 2010, almost 340,000 mortgages were approved – more than in the same period of 2009, when just over 310,000 mortgages were approved, but well down on historic norms.

The Royal Institution of Chartered Surveyors' most recent poll also suggests falling prices. Last month, for the first time since July 2009, more surveyors reported a fall than a rise in house prices as demand from buyers slipped back and the number of properties coming to the market continued to increase.

Demand fell for the second month in a row as continuing difficulty in securing mortgages and increased uncertainty about the prospects for the economy left potential home buyers feeling cautious.

Short-term factors and longer-term fundamentals are conspiring to weaken the market. Although prices rose last year, against expectations, experts say this was largely due to an abnormal shortage of supply, resulting, apparently, from the previous decline in prices and home owners' unwillingness to sell at a loss.

During the depths of the recession, banks and building societies were said to be exceptionally forbearing towards home owners who were struggling to pay their mortgages. This kept repossessions and forced sales well below the levels seen in the last housing recession, in the early 1990s.

However, anecdotal evidence suggests those trends may now have gone into reverse, and the abolition of home information packs by the Coalition Government has led to an unexpectedly large boost in supply. The buy-to-let contribution has also diminished under the weight of capital gains tax.

If anything, Nationwide's figures – which refer only to homes secured with a mortgage – may slightly underestimate the decline in house values. The estate agency Knight Frank revealed yesterday that the "ultra-prime" London market is still healthy, dropping by a mere 0.1 per cent in July. Demand for homes costing more than £5m is often driven by wealthy cash buyers from abroad who have no need for a home loan and who are attracted by the weak pound.

The National Institute of Economic Research recently forecast that house prices over the next five years will fall by 8 per cent, when inflation is taken into account – leaving real values back at 2003 levels by 2015.