British house prices unexpectedly fell by 0.2 per cent in January for the second month in a row in January, due to the prospect of greater unemployment and buyers' problems finding large enough mortgage deposits, data from lender Nationwide showed. Furthermore, the market could tilt further in buyers' favour over the coming months.

The typical house price is £162,228, following the second monthly drop in a row after a 0.2% fall was also recorded in December, Nationwide's latest house price index.  Economists polled by Reuters had expected prices to remain flat on the month, giving an annual rise of 1.4pc. "The weakness in buyer demand is partly a reaction to the uncertain outlook for the economy, especially the labour market. But affordability is also part of the explanation - in particular, finding a sufficient deposit," said Nationwide's chief economist, Robert Gardner.

Britain's housing market, formerly a major driver of consumer spending, has been extremely sluggish since the start of the financial crisis, a point reinforced by Bank of England mortgage data on Tuesday.

Nationwide said that the average first-time buyer now opted to put down a 20pc deposit, compared to 10pc in early 2008. Mortgages with lower deposit requirements are available, but tend to carry punitive interest rates.  Also the lack of new homes coming to market means prices are likely to drop only modestly or move sideways in the near future

Household budgets have been under intense pressure due to high living costs and deteriorating employment conditions. Borrowers are also expected to have a tougher time raising a mortgage this year as lenders tighten their criteria amid the weak economic backdrop.

Robert Gardner, Nationwide's chief economist, said: “Given the challenging conditions prevailing in late 2011, with the UK economy contracting in the final three months of the year, it's not surprising that house price growth softened at the start of 2012.”

He continued: “The demand/supply balance may move further in favour of buyers in the months ahead. The economy is not expected to gather much momentum until the second half of 2012 at the earliest, which suggests that labour market conditions and buyer sentiment may be slow to improve.

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