UK house prices dropped by 0.2 per cent in January, according to Nationwide.

Year-on-year though, property values are up 0.6 per cent. The average home now costs £162,228.

The muted drop reflects the ‘challenging conditions’ at the end of 2011, with the economy contracting by 0.2 per cent, according to the building society.

Robert Gardner, chief economist at Nationwide, comments that the ‘trickle’ of new properties coming onto the market will result in house prices continuing to ‘move sideways or only modestly lower in the months ahead’.

Weak first-time buyer demand is holding back the market, both in terms of the uncertain economic outlook and prospective buyers not being able to build up a significant deposit. However, Gardner notes, the average first-time buyer deposit has dropped back slightly to 20 from 25 per cent since early 2010.

Gardner points to a modest improvement in conditions for first-time borrowers. ‘The decline in long-term interest rates has helped to provide some relief for borrowers. Indeed, interest rates for new lending are currently at a record low, which has helped to improve initial mortgage affordability,’ he says.