House prices have fallen for the first time in seven months, with the number of potential buyers shrinking as more homes are going on the market, according to a study.

The gap between supply and demand is set to widen following an early and unusually rapid seasonal summer slowdown, meaning prices are likely to fall further in the coming months into autumn, property analyst Hometrack says.

Key Points

  • House prices fell 0.1% in July says Hometrack
  • First fall in prices in seven months
  • Number of potential buyers also shrinks

According to research from estate agents and surveyors across England and Wales, prices fell by 0.1% in July after being flat last month. Activity in London and the south east of England - which has been keeping average prices up - has started to slow down.

But price falls in the north of England, which have been bigger than those in the south, could be "bottoming out", the study suggests.

London was the only region to register a price increase in July, with a rise of 0.1%, but the rate of growth has slowed, according to the findings. The north east saw the biggest price fall, with a 0.5% drop.

Prices in the north west decreased by 0.3% and those in Yorkshire and Humberside, the south west, Wales and the West Midlands fell by 0.2%. Prices in the East Midlands and the South East dropped by 0.1% and remained flat in East Anglia.

More homes on the market, but less demand

The mismatch between buyers and sellers was shown by the number of new potential buyers registering with estate agents decreasing by 2.1% this month, as the volume of homes being put on the market rose by 1.4%.

The south east saw the biggest fall in demand in July, with potential buyers decreasing by 3.4%. London also saw an above-average decline of 2.4%.

The Hometrack study says homes are staying on the market for 9.5 weeks on average, a slight increase from 9.4 weeks in June.

Richard Donnell, director of research at Hometrack, says: "Weaker demand is to be expected over the summer months, but compared to previous years, the seasonal slowdown has started earlier and developed more rapidly than in previous years.

"This reflects growing concern over the UK's economy and the deepening eurozone crisis."

Borrowers with smaller deposits are expected to have a particularly tough time finding a mortgage in the coming months as lenders continue to tighten their criteria in the uncertain economy, although there have been some recent signs of increased competition to attract those with larger amounts of equity.

In a sign of what is to come, figures from the British Bankers' Association published last week showed in June, mortgage approvals were at their lowest level in at least 15 years.