House prices fell by 1.0% in December, said Halifax today (Friday), following a downwardly revised increase of 1.6% in November; however prices in Q4 were 4.2% higher than in 2006 Q3.

It was the first fall in prices for six months and a sign that higher borrowing costs are starting to bite. The two quarter point interest rates rises since last August, together with the possibility of a further increase early in 2007, are expected to cause a greater degree of caution amongst homebuyers, said the lender.

In Greater London, the average price increased to £287,176 by the end of the year.  It is now above the inheritance tax threshold (currently £285,000) for the first time. 

The average price in the South West broke through the £200,000 barrier for the first time in 2006 Q4 to £200,931.  The 10.5% increase in prices in the South West in 2006 represented a recovery following a 1.9% fall in 2005. 

Similarly, prices in East Anglia also achieved double digit growth (13.0%) after a small fall in prices (-1.0%) in 2005.

As expected, house price inflation remained modest in northern England in 2006.  The North recorded the lowest regional rise during the year (3.1%), the smallest increase in the region since 2000.

Northern Ireland experienced a 53% increase in its average house prices in 2006, from £128,917 in 2005 Q4 to £196,874 in 2006 Q4.  The increase in Northern Ireland was the biggest regional annual gain since 1988 (West Midlands: 60%).

Martin Ellis, chief economist at Halifax, said, “Continued economic growth, rising employment and an ongoing lack of supply will continue to drive up house prices over the coming months. Higher interest rates, greater pressure on household finances and subdued real earnings growth will, however, constrain housing demand.”