House prices suffered a setback in the new year, recording their first month-on-month fall since May last year, according to a report released today.

Figures from the Halifax, Britain’s largest mortgage lender, said that the average house price in January fell 0.4 per cent from December, wrong-footing economists who had expected a 0.5 per cent increase.

The report came ahead of the Bank of England’s decision on interest rates today. The Bank is widely expected to keep rates on hold at 4.5 per cent.

The Halifax said the average house price now stands at £170,833 compared with £171,362 in December. The figures mean house prices have risen 5.1 per cent over the past year, below predictions of a 5.5 per cent gain.

However, despite the slip in property prices, economists painted a largely robust picture of the market.

Martin Ellis, the Halifax chief economist, said: "Despite this fall, prices have increased by 1.6 per cent over the past three months as the market has strengthened. A mixed pattern of monthly price rises and falls is a typical feature of a slow housing market."

George Buckley, the Deutsche Bank economist, said: "The UK housing market has enjoyed a clear recovery since around the middle of last year."

He added: "The number of transactions rose to over 150,000 a month at the end of last year, compared to a trough of less than 107,000 at the start of 2005."

Howard Archer at Global Insight said the figures were a "welcome dose of reality."

He said: "The limited correction in the Halifax house price index in January following the marked rises during the latter months of 2005 reinforces our strong doubts that house prices will see sustained sharp rises over the coming months."

Halifax expects the housing market to remain flat this year, increasing in value by around 3 per cent, broadly in line with retail price inflation projections.

The lender argues that high house prices in relation to earnings will dampen demand. Meanwhile, council tax and utility bills are expected to rise well above inflation, putting pressure on household finances.

However, the latest figures from the Halifax conflict with other surveys.

In its monthly survey of the sector released last week, Nationwide Building Society said house prices, on a seasonally adjusted basis, rose 1.4 per cent in January from the previous month, up from December’s 0.5 per cent rise.

The increase was the biggest since July 2004 and was also well ahead of expectations.

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