Nationwide figures revealed that after hitting double digit growth of 10.5% in April, annual inflation dropped to 9.8% in May and fell a further percent in June, reflecting the fact house prices were increasing at a faster pace this time last year.
House prices have risen a cumulative 3% over the first half of the year, with average house prices in June reaching £170,111.
Monthly house price growth remains broadly stable, increasing just 0.1% in June following a 0.5% rise in May this year, while the three month on three month rate of change also showed a marginal change from 1.7% to 1.8%.
Martin Gahbauer, chief economist at Nationwide, said: “Barring a significant pick-up in house prices over the next few months, the annual rate of inflation should continue to drift lower, in light of the very strong price increases recorded during the summer of 2009.
“Recent indicators point to an increase in the supply of property coming to the market for sale, perhaps in response to the abolition of Home Information Packs in the opening days of the new coalition government.
“With the level of demand remaining broadly stable, this would in part help to explain the recent slowdown observed in the rate of house price inflation.”
Gahbauer added that the immediate increase of Capital Gains Tax from 18% to 28% for higher rate taxpayers had prevented people from selling early and creating supply distortions in the market, which would have put downward pressure on house prices.
Yet, he added: “Looking beyond the short-term, the spending cuts and tax increases in the Budget will clearly put a squeeze on household disposable incomes, which are undoubtedly an important driver of house prices.
“Given the already elevated level of the house price to earnings ratio, this limits the scope for property values to maintain the very strong upward momentum that we have seen over the last year.”
However, he highlighted that the increase in fiscal consolidation meant interest rates are likely to stay lower than they otherwise would have done, providing some offsetting support to households and mortgage affordability.
Gahbauer said: “An improvement in the public finances raises confidence in interest rate stability, it could even attract more buyers into the housing market over time.
“Provided the economy does not suffer a relapse into recession, the net impact of the Budget on the housing market and house prices should be relatively neutral. This is consistent with the relative stability seen in the housing market during the last major fiscal consolidation in the mid-1990s.”
