The housing market was starting to cool even before Thursday’s surprise interest rate rise, according to new data.

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House price inflation has fallen for the first time in 15 months on an annual basis, judging by the Financial Times house price index published on Friday.

Experts said the market was more likely to slow this year after the cumulative impact of three rate rises in six months.

With investors now betting on another rate rise this year, many homeowners have been rushing to fix the rates on their mortgages. Meanwhile, experts warned of the potential impact on the number of purchases, particularly by first-time buyers and investors.

Ben Broadbent, senior economist at Goldman Sachs, said: “We would not expect the effect of the first two rate rises to have shown up yet. But I would look for turnover indicators to have declined by the spring and for house price inflation to come down in the second half of 2007.”

The Council of Mortgage Lenders agreed that the number of transactions was likely to slow.

First-time buyers are already at their most stretched since 1991, according to a Rics survey published this week.

The UK’s army of buy-to-let investors, meanwhile, has seen a dramatic increase in the gap between borrowing costs and net rental yields. A new landlord should expect to receive a net annual yield of just 3.5 per cent a year from a property, compared with borrowing costs of more than 5 per cent – even before this week’s rate rise.

Charles Fairhurst, chief executive of Fairbridge Residential Investment Management, said: “Buy-to-let exploded in 2003 when interest rates fell to 3.5 per cent. If interest rates stay at 5.25 per cent or move higher, buy-to-let investors and house builders will come under increasing pressure.” Simon Hope, a partner at Savills, warned that further rises towards 6 per cent could be “a trip switch for a big problem”.

Housing demand has remained high, especially in London and the south-east. House price inflation exceeded experts’ forecasts last year, sustained by a rising stock market and City bonuses.

FT data show possible impact of rate rises

The two interest rate rises late last year might have finally had an impact, judging by Friday’s FT data.

Prices rose by an annual 6.8 per cent last month, lower than November’s 7.4 per cent and the first fall in annual growth since October 2005.

Monthly house price growth was stable at 0.6 per cent in December, up from 0.5 per cent in November. London still led the market but monthly house prices in the capital also slowed.

Peter Williams, chairman of Acadametrics, the consultancy that compiles the FT index, said the housing market was still divided regionally between the south-east and elsewhere.

“Monthly house price growth appears to have reached a plateau. Continued high demand alongside low rates of turnover and poor new housing supply has continued to drive southern house prices throughout 2006,” said Mr Williams. “However, the recent pick-up in new supply in the Midlands and the north of England, combined with higher mortgage rates, should result in a continued easing of market conditions in those regions.”

House price inflation was lowest in the east and west Midlands, where prices rose, respectively, by an annual 3.7 per cent and 4.3 per cent in the year to November. London house prices increased by an annual 12.5 per cent, followed by 7.3 per cent in the south-east.

Mr Williams said the regional divide made the Bank of England’s job harder after it put interest rates up by a quarter-point on Thursday. It was the third rise in six months. Higher borrowing costs would take longer to take effect in London, where house prices were being driven by a shortage of good homes on the market, while house price growth in most regional markets in England and Wales was already subdued, he said.

The FT house price index is designed to end confusion about house price changes that has plagued the market for years. It measures every property sold in England and Wales, unlike the mortgage lenders’ figures which are based on samples of properties backed by a mortgage.

This means that the FT house price numbers jump around less than those of lenders, which have in the past exaggerated the volatility of house price movements.

Halifax and Nationwide, the two largest lenders differed on the direction of house price growth in December. Halifax reported a fall of 1 per cent, compared to November while Nationwide reported a 1.2 per cent increase.

The FT index also only measures prices when they are sold, rather than when a mortgage is agreed, so it only includes completed transactions. It tends to be lower than other indices because it excludes Scotland and Northern Ireland, where house prices have been rising at an annual rate of, respectively, 13.6 per cent and 31.6 per cent, according to the Department for Communities and Local Government.