House prices lost further ground in August as the supply-demand imbalance, which drove up prices for much of last year, continues to unwind.

The latest survey from Nationwide revealed a 0.9 per cent month-on-month fall in property prices following a 0.5 per cent drop in July. 

This is the first time since February 2009 that house prices have fallen in two consecutive months and take the average price of property to £166,507. 

Meanwhile the three month rate of change fell from 1.2 per cent in July to 0 per cent in August and could turn negative next month unless house prices bounce back in September.

Martin Gahbauer, Nationwide's chief economist, says: ‘As more sellers have returned to the market, buyers have a greater selection of properties to choose from and more bargaining power with which to bid down asking prices.

‘There is little evidence of distressed selling, however, with the Council of Mortgage Lenders' second quarter figures showing another drop in mortgage arrears and possessions. Given that the price increases of the last year had gotten ahead of the recovery in the wider economy, the current correction is not an unhealthy development.’

Gahbauer adds that interest rates are likely to remain at their current level until well into 2011, and even after then increases will be ‘relatively gradual’ giving variable rate borrowers the time to change to fixed rates if they desire greater certainty over their mortgage payments.

Howard Archer, chief UK economist at IHS Global Insight adds that high unemployment and muted wage growth are still taking their toll with credit conditions remaining tight and making it hard for many people to get mortgages.

Although he believes that a sharp correction in house prices is unlikely, further falls could well on the cards.

‘The recent overall tone of housing market data and surveys has been consistently downbeat. We currently expect house prices to fall by 3 per cent over the second half of the year, but there is a now a very real likelihood that the drop will be nearer 5 per cent,” he adds.

Richard Hatch, head of residential property at consultancy, Carter Jonas, is more positive about the outlook and thinks the market is stabilising, rather than collapsing. He does not expect two months of consecutive declines to be the beginning of a ‘sharper downward price trend’ and explains this is just the market readjusting after getting ahead of itself.