The fall in property values is less than the 2.6% annual decline it recorded in June, which was the biggest annual drop in more than 10 years.

Month-on-month, house prices slipped by -0.3% in July, which is the equivalent of around £1,000 in cash terms and the fourth consecutive decline on the mortgage lender's index.

But Halifax said activity among first-time buyers was "holding up relatively well" and there were signs that borrowing costs were stabilising or even falling.

The lender said that while prices are expected to decrease further this year, the decline will be "gradual rather than precipitous".

A typical property now costs £285,044, down from a peak of £293,992 last August, according to the index.

Halifax's director of mortgages Kim Kinnaird said it showed that "in reality, prices are little changed over the last six months" when compared to the £285,660 average value recorded in February.

She added: "These figures add to the sense of a housing market which continues to display a degree of resilience in the face of tough economic headwinds.

"In particular, we're seeing activity amongst first-time buyers hold up relatively well, with indications some are now searching for smaller homes, to offset higher borrowing costs."

However, she said the buy-to-let sector "appears to be under some pressure" and it remained to be seen how many landlords might choose to exit the market.

The report also found stark regional differences in the market.

Prices remained "effectively flat" in the West Midlands, while in the South East property values fell by more than £15,500 - 3.9% - to an average of £382,489 in the year to July.

That trend was mirrored in Greater London, where prices dropped by 3.5% to £531,141.

Read more:
Cost of living latest
Barbie execs 'speechless' as film tops $1bn in box office sales
Construction industry makes surprise return to growth

It comes as mortgage affordability remains stretched for many amid high-interest rates.

The Bank of England hiked rates for 14th time in a row to 5.25% last week as part of efforts to bring down inflation - and warned they are expected to remain at high levels for longer than markets previously anticipated.

But there was a bigger-than-expected drop in inflation in June and the Halifax said there were signs that borrowing costs were now "stabilising or even falling", although mortgage rates are likely to remain much higher than in previous years.

Ms Kinnaird said: "The continued affordability squeeze will mean constrained market activity persists, and we expect house prices to continue to fall into next year.

"Based on our current economic assumptions, we anticipate that being a gradual rather than a precipitous decline."

Imogen Pattison, an assistant economist at Capital Economics, described the latest figures as a "modest drop" but said prices falls could speed up and continue into 2024.

She added: "While house prices are proving relatively resilient so far, the significant rise in mortgage rates is set to cause a renewed slump in demand, while previously tight supply conditions are easing.

"As a result, we expect house price falls to accelerate in the second half of the year."

It comes after Nationwide reported the biggest fall in house prices in 14 years on its separate index earlier this month.

The building society said annual property values declined by 3.8% in July - the sharpest fall since July 2009.