UK average house prices have returned to the level they were at in August 2006, while also coming in at 6.1% lower than reported in June 2007, Halifax has said.

The decline in prices is driven by a squeeze on spending power, affordability difficulties due to the rapid rise in house prices in the last few years and the decline in credit availability resulting from the crisis in the financial markets, the lender said.

The UK average house price remains slightly higher (2%) than two years’ ago, more than 10% higher than in June 2005 and almost 40% above that in June 2003. That average price tag now costs £180,344.

However, there is a glimmer of light for the market. Halifax found that strong employment levels and low interest rates meant that housing values retained firm foundations despite recent price falls.

However, it’s a squeeze on spending power, rapid house price growth in recent years and the lack of availability of mortgages were behind the latest monthly fall

Commenting, Martin Ellis, Halifax chief economist, said: “House prices have declined by 6.1% over the past year. Nonetheless, the average UK price remains slightly higher than two years’ ago and is appreciably stronger than three or four years ago.

House prices fell by 2.0% in June compared to 2.5% in May, a slight moderation in the recent rate of decline.

The average UK price has risen by 150% during the past decade from £72,096 to £180,344; an increase of £108,248. Prices have risen by 196% (£119,379) since the trough of the 1990s housing market downturn in July 1995.

A strong labour market, low interest rates and a shortage of new houses underpin housing valuations. Our research shows that the labour market is the key driver of the housing market. Employment is at a record high.”