UK house prices fell unexpectedly in August, a sign affordability remained stretched even after the Bank of England (BOE) eased borrowing costs, according to one of the top mortgage lenders.

Nationwide Building Society said its index of house prices declined 0.2%, the first drop since April. Economists surveyed by Bloomberg had expected a 0.2% increase.

The figures suggest an uneven recovery is under way after last year’s dip. While the BOE cut rates for the first time since the pandemic on Aug 1 and living standards are rising, many first-time buyers are still finding it hard to get onto the housing ladder after years of house prices outpacing wages.

Mortgage rates are still triple their level in 2021 and BOE inflation-fighters are expected to take a cautious approach to cutting rates - markets are only fully pricing in one more reduction this year. Greater supply is giving price-sensitive buyers more bargaining power.

The average cost of a home this month was £265,375 , up 2.4% from a year earlier - the fastest annual pace since December 2022. However, values are still 3% below their all-time high in the summer of the same year.

“While house price growth and activity remain subdued by historic standards, they nevertheless present a picture of resilience in the context of the higher interest rate environment and where house prices remain high relative to average earnings,” said Robert Gardner, chief economist at Nationwide.

“Providing the economy continues to recover steadily, as we expect, housing market activity is likely to strengthen gradually as affordability constraints ease through a combination of modestly lower interest rates and earnings outpacing house price growth.”

Surveys suggest the overall outlook for the housing market this year remains positive - a prospect few predicted at the end of 2023 after a spike in borrowing costs intensified the cost-of-living crisis and tipped the economy into recession.

Buyers are now feeling more confident about their financial situation. Wages are rising faster than consumer prices, economic growth has been stronger than forecast this year and the BOE has hinted at further rate cuts. Policymakers are expected to hold rates at 5% when they meet next month but markets are betting on another reduction in November, and a chance of a further cut by the end of the year.

Mortgage costs have been falling since June in anticipation of the BOE cutting rates. The average rate on a two-year fixed deal is now 5.58%, down from around 6% earlier in the summer, according to Moneyfacts.

“Financial markets are pricing in another cut this year and as mortgage rates fall this autumn, it should underpin transactions and modest single-digit price growth, Tom Bill, head of UK residential research at Knight Frank.

In separate reports this month, Rightmove plc said buyers stepped up their search for property, encouraged in part by the end of political uncertainty after Keir Starmer’s Labour Party won a landslide victory in the July 4 general election. Zoopla meanwhile said buyer demand was rising and estate agents had more property on their books than at any time in seven years.

  - Bloomberg