House prices declined by 1.3% in September, bringing the annual fall to 12.4%, according to the latest Halifax house price index. But the rate of decline may be stabilising: the fall in September was the smallest for seven months.

The annual rate is calculated using a comparison of the past three months compared with the same three months a year ago, with the aim of cutting out any short-term volatility.

“The ongoing pressures on householders' income, combined with the reduction in the availability of mortgage finance, however, mean that market conditions will remain challenging," said Halifax’s chief economist, Martin Ellis.

The average price of a house in the UK is now £172,108. This is close to the level it was at in January 2006, when it stood at £170,866.

The house price-to-earnings ratio - a key affordability measure - is improving. From a peak of 5.84 in July 2007 it dropped to 5.02 in July 2008. This is the lowest level for more than four and a half years: it stood at 54.01 in February 2004. Halifax expects a further improvement in the ratio as prices continue to soften. The long-term average is 4.0.

The lender also applauds yesterday’s 50 basis points cut in the interest rate, saying it will help borrowers faced with increasing pressures on their finances and provide a valuable support to the housing market.

Significant pressures on housing demand have been causing house prices and activity to fall. Average earnings have increased at an insufficient pace to match the rise in retail prices over the past year, rising by 3.5% compared with a 5.0% increase in the RPI. At the same time as this decline in real earnings, significant rises in fuel and food prices - 25% and 13% higher respectively during the last 12 months - have reduced the amount of discretionary income available to households.

The resulting pinch on incomes, combined with the high level of average house prices in relation to earnings, has made it difficult for potential house purchasers to enter the market.  The decline in credit availability is a further constraint on buyers.

The average mortgage rate paid by new borrowers has risen by 22 basis points over the past year, from 5.88% in August 2007 to 6.10% in August 2008, despite a 75 basis points cut in the  interest rate over this period.  This increase reflects the significant rise in lenders' funding costs since the beginning of the financial crisis.

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