LONDON (Reuters) - British house prices unexpectedly fell last month and recorded their smallest quarterly increase in nearly two years, adding to signs that the market is cooling, figures from mortgage lender Halifax showed on Thursday.
House prices dropped 0.4 percent in October, in contrast to economists' forecasts of a 0.4 percent rise, and the 0.6 percent increase previously reported for September was revised down.
Looking at the three months to October - which many analysts prefer, as it smooths out monthly volatility - house prices grew by just 0.8 percent, the smallest increase since late 2012 when the recent surge in house prices started to get under way.
"Evidence of a housing market slowdown is now coming pretty thick and fast," said Howard Archer, chief UK economist at IHS Global Insight.
Halifax said growth was still strong enough to support housing demand over the coming months, but that buyers were getting worried about higher BoE interest rates, which many economists expect to rise in the middle of next year.
"This concern is likely to curb buying intentions," said Martin Ellis, housing economist at Halifax.
Annual house price inflation peaked in June at 10.2 percent on Halifax's measure but is now just 8.8 percent, and data from rival lender Nationwide have shown a similar trend.
The number of new mortgages issued by lenders fell in September to its lowest since July 2013, according to figures from the Bank of England, partly due to tougher affordability requirements introduced by regulators in late April.
BoE Governor Mark Carney said earlier in the year that big rises in borrowing to pay more for expensive homes could prove the biggest threat to Britain's recovery.
The housing market was an early driver of Britain's robust recovery over the past 18 months, but more recently there have been tentative signs that economic growth may slowing, as export prospects to the euro zone darken.
(Reporting by David Milliken; Editing by Tom Heneghan)