House prices fell for the third month in a row over December, with average values falling by 0.3%, the largest monthly fall since January 2005 according to Hometrack.

The property group said year on year rate of growth fell back to +0.3%, the lowest rate of growth since June 2006.

Despite the slow end to the year, overall average values were up by 3% over the course of 2007, around half the rate of growth recorded over 2006.

Hometrack said that 2007 could be broken into two halves. The first half of the year saw the momentum in house price inflation that built up over 2006 carried over into 2007, with the real impetus coming from the central London market and key commuter routes of southern England. But the boom of early 2007 was limited to just 30% of the market. Across the rest of the country house price growth was far more subdued as interest rate increases began to bite.

The second half of the year saw a major reversal in confidence on the back of higher interest rates and concerns over the outlook for the financial markets. The greatest turnaround in market conditions has been seen in southern England where the market is slowing off a high base.

Weakening demand has resulted in small headline price falls
The weakening in demand has resulted in small headline house price falls, primarily over the last 3 months of the year. These have been concentrated in those areas where the market has been generally weak over the course of 2007 or where the market has slowed off a high base.

The strongest growth over 2007 was seen in the “Central London and City” - up 9.4% over 2007 - but this area has also seen falls of 1.1% over the last 3 months. Oxfordshire recorded the largest fall in values over the last 3 months (-1.5%) although values were up 4.2% over the whole of the year.

Looking ahead to 2008, Richard Donnell, Director Research, Hometrack said: “Despite the recent cut in interest rates, levels of market activity are likely to remain subdued over the course of 2008. A weak outlook for prices and continued uncertainty among sellers creates the potential for a major lack of housing coming to the market in the first quarter of the year.

Overall we expect average prices to rise by just 1% over 2008 with sales volumes projected to be down 17%.”