According to Hometrack, house prices fell for the third consecutive month in December by 0.3%, which was the largest monthly fall since January 2005.

The year-on-year rate of growth slipped back to 3% in 2007, which was the lowest annual rate of growth since June 2006. In addition, the average time to sell has reached 8.3 weeks, which is the highest level since the survey began in 2001.

Richard Donnell, Hometrack’s director of research, said: “There have been two distinct phases of activity across the housing market in 2007. The real impetus behind the headline rate of growth came from the central London market as well as the key commuter routes of southern England where values were being driven ahead by a lack of supply and strong demand. Indeed, our analysis shows that the boom of early 2007 was actually limited to just 30% of the market. Across the rest of the country house price growth was far more subdued and interest rate increases were already beginning 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. Many would-be buyers have stepped back from the market and the greatest short term casualty has been lower levels of market activity with sales volumes down by 18% over the last 6 months.”

Weakening in demand resulted in small house price falls, which primarily took place over the last three months of 2007. These have been concentrated in areas where the market has been generally weak over 2007. Last year, house prices in South Yorkshire, Nottinghamshire and North Lincolnshire fell by up to -1%. The strongest growth over 2007 was seen in the Central London and City area where values were up 9.4% but values fell by 1.1% over the last 3 months of 2007. 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.

Donnell said: “Despite the recent cut in interest rates, levels of market activity are likely to remain subdued over the course of 2008, especially over the first half of the year. The housing market is in danger of facing its own liquidity squeeze in the first six months of 2008. High transaction costs, a weak outlook for prices and continued uncertainty among vendors 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%.”