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Finance

House prices 'fall at fastest rate for two decades'

29/05/2008

UK house prices have experienced their biggest drop for 17 years, Nationwide said on Wednesday.

Its monthly house price index for May has further raised fears over a radical correction in property values.

As a result average house prices are down 4.4 per cent over the last year. This shows an acceleration of the trend begun last month, with prices down just one per cent over the year.

The average price of a property is now £173,583, down from the £178,555 recorded in April.

At seven months this is also the longest consecutive run of negative results recorded by Nationwide since 1992. However, at that time, annual prices were falling at a rate of 6.3 per cent.

However, Nationwide points out, given the unprecedented growth in the market over the last two years, prices are still five per cent higher than two years ago and ten per cent higher than three years ago.

It is also though tighter credit conditions in the present climate – which have seen banks cut maximum loan-to-value ratios and raise interest rates - will help the longer term sustainability of the market.

"Problems in credit markets have clearly been the trigger for changing fortunes in the housing market and while it is never wise to place too much weight on one data point, the apparent speed of the adjustment may lead the monetary policy committee to look more closely at the balance of risks to inflation in the medium term," commented Fionnuala Earley, Nationwide's chief economist.

The Bank of England has cut interest rates three times in the past six month – by 0.25 per cent in December, February and April – bringing the base rate to five per cent.

However, further cuts could be delayed by an increasing rate of inflation, with the consumer price index presently at three per cent – ahead of the government's target of two per cent.