It is the first fall recorded by the index for 15 months.
Estate agents reported a 1.3% drop in the number of new buyers registering with them in July.
However, new properties have continued to come on to the market – agents reported 3.6% rise in the number of homes for sale.
Hometrack believes the latest fall in demand reflects a trend seen during the past five months, with concern about the economy and talk of impending spending cuts taking their toll on people’s confidence in the market.
The change in conditions has seen the market shift from being a sellers’ one to a buyers’ one.
It has also led to the average time a property takes to sell increasing to 8.7 weeks – its highest for almost a year.
Actual sale prices are also sufferig with sellers getting a lower proportion of their asking price – an average of 94%, down from 94.3% in June.
Hometrack director of research Richard Donnell said: "Levels of demand for housing have been slowing for the last five months.
"Prices moved lower by 0.1% with the year-on-year rate of growth slowing to 2%.
"Further modest price falls are inevitable over the second half of the year as the volume of homes for sale continues to rise and demand remains weak on the back of concerns over the wider economic outlook and uncertainty over the impact of recently announced cuts in government spending."
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