Shock fall in house prices

At the same time, figures from the Bank of England showed the credit squeeze is biting, with the number of mortgages taken out at the lowest level for three years.

And in a triple blow to home owners, the Halifax, the UK’s largest mortgage lender, warned that property could be overvalued by as much as a third.

The average cost of a home fell by 0.8 per cent this month, according to the Nationwide. It is the first time it has recorded a drop since February last year and the monthly fall is the biggest since June 1995.

Just 88,000 home loans were approved in October, the lowest figure since February 2005 and well down on the recent monthly average of 109,000.

A report from the Halifax sounded the alarm that the property market could suffer a similar slump next year to that in America.

Its author Karen Ward said: “The credit squeeze could prove the trigger for Britain’s housing slowdown. Higher mortgage costs would spark repossessions and make buy-to-let a poor investment.

“A major demand in the last couple of years would then turn into a major source of supply, thereby cutting prices. A slowdown in consumer spending and residential construction would follow, causing growth to fall to its lowest level in a decade.”

Conservative Treasury spokesman Philip Hammond said: “This is yet more bad news in a terrible week for Gordon Brown and Alistair Darling.

“With house prices showing their biggest monthly fall in 12 years and gloomy predictions from the governor of the Bank of England about the near-term prospects for the economy, Gordon Brown’s economic legacy is falling apart as quickly as his party.”

The grim warnings for home owners mean there is now little doubt that the housing market is slowing down in the face of higher interest rates and stretched affordability.

The Nationwide figures show annual house price inflation falling to 6.9 per cent, down from 9.7 per cent the previous month, leaving the average home in the UK costing £184,099.

Simon Rubinsohn, chief economist at the Royal Institution of Chartered Surveyors, said: “This data provides further evidence that the housing market is slowing sharply.

“However, we still expect most of the fall-out from the current round of turmoil in credit markets to be felt in terms of lower levels of activity rather than outright house price declines.”

Several house price indices have shown price falls recently, with Halifax reporting a drop of 0.5 per cent in October, following a fall of 0.6 per cent in September.

Property information group Home-track said house prices in England and Wales fell for the second month in a row during November, by 0.2 per cent, while website Rightmove said they dropped by 0.7 per cent in the four weeks to November 10.

The RICS said house prices fell at their fastest rate for more than two years during October as would-be buyers continued to stay away from the market.

And last month the International Monetary Fund calculated that homes were 40 per cent over-valued. Seem Shah, property economist at Capital Economics, said: “Today’s data is consistent with several other house price indices which have been reporting house price falls in the last couple of months.

“As such, we continue to believe that a period of sustained house price falls is likely over the next couple of years.”

The group is predicting a three per cent drop in house prices across the UK during 2008, with further falls in 2009.

The Bank of England’s mortgage approval figures suggest the housing market slowdown may still have further to go.

Jonathan Loynes, of Capital Economics, said: “October’s mortgage approvals data from the Bank of England will add to the gloom over the housing market after this morning’s weak Nationwide prices figures.

“Approvals have not been quite such a good predictor of house price inflation over the last year or so as they have been in the past.

“Nonetheless, at this level, they would certainly appear to be consistent with a further slowdown in the annual rate of house price inflation.”

The Bank of England said that mortgage approvals were lower across the board, with a total of just 236,000 loans for all purposes approved in October, down from a recent average of 279,000, while their value of £25billion was the lowest since July 2005.

The amount of money advanced through mortgages was also subdued, with net lending, which strips out redemptions and repayments, of just £7.33billion, 29 per cent below the amount lent in October last year and the lowest level since February 2005.

Michael Coogan, director general of the Council of Mortgage Lenders, said: “The market is slowing, as we have always said it would at this point in the year.

“We are calling on the Government and the Bank of England to take action to unblock the funding logjam that some UK lenders are experiencing.”