By Suban Abdulla

LONDON, Jan 8 (Reuters) - British house prices rose by a slower-than-expected 0.3% in the 12 months to December, the weakest annual increase since March 2024, as economic and tax uncertainty overshadowed the market at the end of the year, mortgage lender Halifax said on Thursday.

Prices unexpectedly fell in month-on-month terms, dropping by 0.6% in December after falling 0.1% in November. Economists polled by Reuters had forecast prices would be 1.1% higher than a year earlier and rise 0.2% on the month.

"While December's monthly fall in prices was likely related to uncertainty in the latter part of the year, this should now be starting to unwind," Amanda Bryden, head of mortgages at Halifax, said.

Bryden said a combination of lower mortgage rates and modest growth in property prices improved affordability for first-time buyers, with the house price to income ratio at its lowest in over a decade in December.

But Matt Swannell, chief economic advisor to the EY Item Club, a forecasting group, said he did not expect much improvement in affordability as the loosening in the labour market would likely slow wage growth, saying there was also limited scope for big falls in mortgage rates in 2026.

"It looks very likely interest rates will be cut less this year than they were last year," Swannell said.

The Bank of England cut interest rates to 3.75% from 4% in December, and investors are pricing in one or two more quarter-point cuts this year.

Thursday's data chimed with rival mortgage lender Nationwide's measure of house prices, which fell by 0.4% in December alone while its estimate of annual house price growth was the weakest since April 2024.

Halifax expected annual house price growth of 1-3% in 2026.

A Reuters poll of property market experts conducted in December showed British home prices were expected to rise by 2.8% in 2026, speeding up from a full-year rise of 2% in 2025.

House prices in London dropped by 1.3% from 12 months earlier while the strongest growth was reported in Northern Ireland where prices rose by 7.5%, Halifax said.

(Reporting by Suban Abdulla; editing by Sarah Young, Kate Holton, Alexandra Hudson)