By Suban Abdulla

LONDON (Reuters) -British house prices dropped on an annual basis in May for the first time in 11 years, mortgage lender Halifax said on Wednesday, as the drag on the housing market from rising interest rates became clearer.

The average property price fell 1.0% compared with May last year, the first year-on-year decline since December 2012, in line with forecasts in a Reuters poll.

Prices were unchanged in monthly terms from April when they fell 0.4%.

Kim Kinnaird, director of mortgages at Halifax, said demand was weakening and higher interest rates were likely to increase pressure on house prices.

Britain's housing market recovered somewhat in early 2023 from the weakening late last year in response to former Prime Minister Liz Truss's announcement of unfunded tax cuts, which triggered turmoil in financial markets.

"The brief upturn in the housing market in the first quarter has faded, with the impact of higher interest rates gradually feeding through to household budgets, and in particular those with fixed rate mortgage deals coming to an end," Kinnaird said.

Separate figures from UK Finance showed lending to first-time buyers in the three months to March was the weakest since spring 2020 when the housing market was largely shut due to the COVID-19 pandemic.

Some mortgage lenders last month reduced or repriced their loan offers after bond yields jumped when consumer price inflation came in at 8.7% in April, above the consensus of 8.2%.

Halifax, part of Lloyds Banking Group, on Tuesday said it would raise interest rates for its fixed home loans from Wednesday.

Analysts at Capital Economics said higher rates could trigger a renewed downturn in Britain's housing market.

Nationwide, another lender, last week reported a 0.5% month-on-month drop in house prices in April and a 3.4% annual decline - the biggest drop since 2009.

(Reporting by Suban Abdulla Editing by Barbara Lewis and Mark Potter)