Robert Gardner, Nationwide's chief economist, said average prices are now 4% below their August 2022 peak.
He added: “Recent Bank of England data suggests that housing market activity remained subdued in the opening months of 2023, with the number of mortgages approved for house purchase in February nearly 40% below the level prevailing a year ago, and around a third lower than pre-pandemic levels. However, in recent months industry data on mortgage applications point to signs of a pickup.
“This also chimes with the recent shifts in consumer sentiment. While confidence remains subdued by historic standards (as shown in the chart below), people’s views of their own financial position over the next twelve months, and general economic conditions in the year ahead, have both improved markedly in recent months. If inflation falls sharply in the second half of the year, as most analysts expect, this would likely further bolster sentiment, especially if labour market conditions remain strong.
“This, in turn, would also be likely to support a modest recovery in housing market activity.”
Gardner said any upturn is likely to remain “fairly pedestrian”, as it will take time for household finances to recover, since average earnings have been failing to keep pace with inflation, and by a wide margin over the last few years.
He added: “Mortgage interest rates are also likely to act as a headwind. While they are well below the highs seen in the wake of the mini-Budget last year, rates are still more than double the level prevailing a year ago.
“Nevertheless, if gains in nominal incomes remain solid, this, together with weak or declining house prices, will help improve housing affordability over time, especially if mortgage rates continue to trend lower.”
Commenting on the data, Tom Bill, head of UK residential research at Knight Frank, said: “The reverberations from the mini-Budget that shook the UK property market are fading.
“Price declines are bottoming out and many buyers have accepted the new normal for mortgage rates as stability returns to the lending market. Boosted by savings accumulated during the pandemic, record levels of housing equity and a strong jobs market, activity has been solid without being spectacular this year. Supply is rising, which will increase downwards pressure on prices but the market is returning to earth rather than falling off a cliff.
“Properties that tick all the right boxes will hold their value but some of the pandemic froth has disappeared so asking prices will come under pressure.
“After a General Election, successive lockdowns, a Stamp Duty holiday and the mini-Budget, the UK housing market should have its most predictable year since 2018. However, we don’t expect widespread standoffs over price because of lingering economic uncertainty and a growing realisation that next year’s election may shake things up again. Switched-on buyers and sellers are acting now while things are relatively uneventful.”
Nathan Emerson, chief executive of agency trade body Propertymark, added: “Our member agents are reporting transaction levels year on year to be stable as a stream of new properties enter the market with serious buyers still keen to move.
"Sellers are still in a strong position to sell; however, they can no longer test the market at higher prices and align with those achieved last year. Instead, they will need to reduce or be open to offers for a more realistic and efficient sale.”