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This represents a slight moderation in the recent rate of decline, from 2.5 per cent the previous month.

Prices for the past 12 months have shown a 6.1 per cent drop, with the average price of a home in the UK now £180,344.

Price falls should be seen in the context of the significant gains in recent years. Average house prices have returned to the level they were in August 2006, but are still 10 per cent more than in June 2005 and almost 40 per cent more than in June 2003.

UK prices have increased by 196 per cent since July 1995, the low point of the 1990s housing market downturn. Prices increased for 48 consecutive quarters between the final three months of 1995 and the third quarter of last year with the exceptions of the second quarter of 2000 when prices fell slightly (minus 0.1 per cent) and the second quarter of 2005 (0 per cent).

A large proportion of homeowners are buffered from the effects of moderate price falls, having built up substantial levels of equity in their homes.

This is down to a combination of borrowers putting down bigger deposits in recent years, alongside the significant increase in house prices.

Bank of England figures in a Financial Stability Report published in April 2008 suggest some 70 per cent of mortgage holders have at least 50 per cent equity in their homes.

The present decline in prices is partly due to current constraints on spending power. There has been a slight fall in real earnings in the last year.

Average earnings rose by 3.8 per cent in the year to April compared with a 4.2 per cent increase in the headline rate of retail price inflation for the same period.

Significant increases in both fuel (12 per cent) and food prices (8 per cent) in the last year have reduced the discretionary income available to households to fund house purchase.

Other factors helping to curb housing demand include affordability difficulties due to the rapid rise in house prices in the last few years as well as the squeeze in credit availability resulting from turmoil in the financial markets.

The economy begins to show signs of a slowdown but underlying conditions are still strong.

The labour market is the key driver of the housing market and employment remains high at 29.55m. Total employment increased by 76,000 in the three months to April compared with the previous quarter and by 446,000 in the past year.

Despite inflationary pressures, the Bank of England chose to hold its rate at 5 per cent in July, a level that remains historically low. These factors will help to mitigate the effects of further economic slowdown later this year.

Martin Ellis is chief economist of Halifax