Monthly drop to the end of December brings average house price to £162,435.

The average house price fell by 1.3% between November and December, according to the Halifax house price index, while during the final three months of 2010, prices fell by 0.9%.

Halifax works out the average price based on movements in the preceeding quarter, which smooths out monthly fluctuations.

Halifax housing economist Martin Ellis says: “On an annual basis, prices in December were 1.6% lower as measured by the average for the latest three months against the same period a year earlier. Prices in December alone were 3.4% lower than in December 2009. Looking forward, we expect limited movement in house prices during 2011 but with the risks on the downside.”

Ellis believes that low interest rates will support the housing market during 2011: “Interest rates are likely to remain very low for some time. This will continue to support a favourable affordability position for those entering the market and limit financial pressure on existing homeowners to sell. Current signs that homeowners are becoming more reluctant to sell would, if continued, help reverse the imbalance between buyers and sellers. Nonetheless, uncertainty about the economy, weak earnings growth and higher taxes could put some downward pressure on demand.”

Lower interest rates have reduced the financial burden on those with existing mortages, according to Halifax research. Since 2007, typical mortgage payments for a new borrower have fallen from a peak of 48% of average disposable earnings, to 29% in the last quarter of 2010. This measure of affordability is at a better level than the long-term average over the past 25 years (37%) and is an important factor supporting housing demand.