House prices fell by £9,000 between June and July as the loss of stamp duty savings cooled the market fast.
The average UK home sold for £256,000 in July, a 3.4pc decline since June, according to the Office for National Statistics.
The fall followed a massive 62.8pc month-on-month drop in transactions in July, as the maximum savings from the stamp duty holiday plunged from £15,000 to £2,500.
But values were still up year-on-year. Annual house price growth slowed to 8pc, down from 13.1pc in June.
The stamp duty holiday, which meant that buyers in England and Northern Ireland could save up to £15,000 in tax if they completed sales before June 30, and will now save up to £2,500 if they complete by September 30, has artificially distorted sales activity.
Sarah Coles, of financial services company Hargreaves Lansdown, said: “This was always going to happen to come extent after the distorting effect of a tax break.
"However, there are no signs of imminent price falls, because the race for space, rock bottom mortgage rates, and the welcome return of first-time buyers are continuing to breathe life into the market.”
Joshua Elash, of lender MT Finance, added: “This is a temporary dip and we expect an immediate bounce back both in terms of transactional volume and house price growth".
In Scotland, where the equivalent but less generous transaction tax holiday ended in March, house prices continued to rise. Annual house price growth hit 14.9pc, up from 12pc in June. This made it the fastest growing country for values in the UK.
The Welsh land and building transaction tax holiday ended completely in June, but this tax break was much smaller than in England and Northern Ireland. The maximum saving was just £2,450, meaning the loss of the incentive had less impact than in England. Annual house price growth in Wales declined from 16.7pc in June to 11.6pc in July.
In England, however, the annual growth rate fell from 13.3pc to 7pc. Northern Ireland's remained the same at 9pc.
The post-lockdown race for space meant that London continued to underperform for the eighth consecutive month, with growth of just 2.2pc.
As the tax savings disappear, the market is returning to more normal levels of demand, after a year of record breaking activity.
Savills estate agents’ analysis of data from analytics firm TwentyCi showed that agreed sales in August were 9pc above the 2017 to 2019 average. This was a drop of 44 percentage points since April, and the lowest level since June 2020.
Nicky Stevenson, of estate agents Fine & Country, said: “As the stamp duty holiday is tapered, this could be the start of that gradual softening, though sustained falls in valuations remain unlikely with bidding wars still rife for the most desirable homes.” A shortage of supply will continue to underpin values, she added.
Rising inflation, which will put pressure on the Bank of England to raise interest rates, has become a looming threat to the property sector. Inflation in August hit 3.2pc, a jump of 1.2 percentage points from July. This was the biggest monthly jump since records began in 1997.
If the Bank of England is pushed to raise the Base Rate sooner than expected, the cost of mortgage borrowing will go up. In turn this will hit affordability and buyer demand.