Higher borrowing costs have led to a drop in house prices in August, The Halifax said today.

In its monthly house price index out today the Halifax said that house prices fell by 0.6 % in August from the previous month for an annual rise of 21.3 %

House prices have increased by 1.8% during the past three months, the bank said. This is significantly below the 6.5% rise recorded in the preceding three months. It is becoming increasingly clear that the five rises in interest rates since November 2003 are acting as a brake on house price growth.

This latest data backs up Nationwide Building Society's equivalent house price index published earlier this week, which rose just 0.1% from July - the smallest gain since November 2000 - for an annual increase of 18.9%.

A number of other key market indicators have shown a softening in housing market activity over the past few months, said the Halifax today. These indicators, however, show that activity levels remain at historically high levels and are consistent with a moderating housing market.

The market remains well underpinned by a strong economic background, historically low debt-servicing costs and supply shortages. The labour market is performing well with the claimant count unemployment rate at a 25-year low of 2.7% and employment growing by 443,000 in the past two years.

Halifax continue to expect house price inflation to slow gradually over the remainder of 2004 and into next year as higher interest rates and the increasing difficulties faced by potential first-time buyers in entering the market curb housing demand.

Martin Ellis, Halifax chief economist, said: "Occasional monthly falls are part of the normal fluctuations in the housing market, even during periods when the market is very strong. Indeed, this is the tenth monthly fall in the last five years: a period when prices have been on a very strong upward trend."

"Recent interest rate rises and constraints on first-time buyer affordability will, however, curb house price inflation and activity. The difficulties faced by potential first-time buyers in entering the market are underlined by the latest CML figures, showing that first-time buyers took out only 28% of home loans in the three months to July; significantly below the 44% average over the past ten years. We expect house price growth to moderate over the remainder of 2004 and into 2005."