The figure is also down by 1.9% on a monthly basis, the largest drop since November 2022.

It means average prices have fallen by £14,000 over the past year, back to levels seen in early 2022 but remain around £40,000 above pre-pandemic levels, Halifax said.

Kim Kinnaird, director of Halifax Mortgages, said: “It’s fair to say that house prices have proven more resilient than expected so far this year, despite higher interest rates weighing on buyer demand. 

“However, there is always a lag-effect where rate increases are concerned, and we may now be seeing a greater impact from higher mortgage costs flowing through to house prices. Increased volatility month-to-month is also to be expected when activity levels are lower, though overall the pace of decline remains in line with our outlook for the year as a whole. 

“Market activity levels slowed during August, and while there is always a seasonality effect at this time of year, it also isn’t surprising given the pace of mortgage rate increases over June and July. 

“While these did ease last month, rates remain much higher compared to recent years. This may well have prompted prospective buyers to defer transactions in the hope of some stability, and greater clarity on the future direction of rates in the coming months.”

Kinnaird suggested the market will continue to rebalance until it finds an equilibrium where buyers are comfortable with mortgage costs in a higher range than seen over the previous 15 years. 

She added: “We do expect further downward pressure on property prices through to the end of this year and into next, in line with previous forecasts. While any drop won’t be welcomed by current homeowners, it’s important to remember that prices remain some £40,000 above pre-pandemic levels. 

“It may also come as some relief to those looking to get onto the property ladder. Income growth has remained strong over recent months, which has seen the house price to income ratio for first-time buyers fall from a peak of 5.8 in June last year to now 5.1. This is the most affordable level since June 2020, and will be partially offsetting the impact of higher mortgage costs.”

Commenting on the data, Iain McKenzie, chief executive of The Guild of Property Professionals, remained positive, suggesting the readjustment puts the market back to 2022 levels.

He said: “Much of this change is influenced by the greater flexibility in asking prices that we are seeing across the country. The South of England is particularly impacted by the fall in house prices, although many first-time buyers in parts of the South have found the market unaffordable for years.

“The landscape is unlikely to change anytime soon. The continued demand for good quality housing is keeping house prices propped up, but affordability concerns and the slower rates of mortgage approvals is stopping growth. 

“The autumn months are usually still busy, as Brits look to hunker down in their new homes before the winter weather kicks in. It remains to be seen whether we will continue to see these sudden drops in house prices.”

Tom Bill, head of UK residential research at Knight Frank, added: “House prices have fallen as mortgage rates have risen but the political and economic volatility of the last 12 months has taken its toll on sentiment. 

“Buyers and sellers knew interest rates would rise after being close to zero for 14 years, they just didn’t expect it to feel like being strapped into a roller-coaster. 

“We don’t anticipate a cliff-edge moment for prices but a single-digit decline this year is likely to be repeated next year. A strong jobs market, lender flexibility and the prevalence of fixed-rate deals in recent years will all act as shock-absorbers but sentiment will only improve when there is more certainty that the current cycle of rate hikes is over. Even then, the adjustment to higher borrowing costs and the looming General Election mean we don’t expect a housing market firing on all cylinders.”