Credit crunch: House prices show worst fall for 16 years

Credit crunch: House prices show worst fall for 16 years

House prices fell for the eighth month in a row in June to record their worst annual drop for 16 years, the Nationwide said yesterday, revealing the latest in a string of figures showing house prices are slumping. The lender said prices fell almost 1% last month from May following a 2.5% tumble the month before that was the biggest drop on record. Prices were 6.3% down on the year, the biggest decline since December 1992. They have been on a rapid downward path since peaking last autumn at £186,000 for the average property. That figure is now at £172,000 and many experts think prices could fall another 20% or more.

The credit crunch has dried up the supply of mortgages, which the Bank of England revealed on Monday had collapsed by 28% in May from April - the biggest drop recorded. "The tightening of credit conditions along with changing expectations of house price growth and a general weakening in consumer confidence in the economy have led to a severe slowing in housing market activity," said Fionnuala Earley, the Nationwide's chief economist. "With house purchase transactions so far below their long-term trend it seems unlikely that there will be any rapid turnaround in housing market fortunes in the coming months. However, as prices continue to fall, affordability measures become more favourable for those in a well-financed position to be able to buy," she added.

Jonathan Loynes at Capital Economics said the market had further to fall. "The.....continued below

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news on the housing market over the last month has simply been dire. The collapse in the number of mortgage approvals to well below the levels reached in the early 1990s suggests that, by the end of the year, prices will have fallen by 15-20%."

Economists said the Bank of England was in no position to cut interest rates to support the flagging housing market because it was more concerned with rising inflation.

The Bank's monetary policy committee holds its latest interest rate meeting next week, but it is almost certain to leave its key interest rate steady at 5%.

"Indeed, it is very possible the BoE's next move could be to raise interest rates, which could clearly be very bad news for the housing market," said Howard Archer, economist at Global Insight.

Nationwide said house prices had fallen in all areas of the country during the past year except Scotland, where they inched up by 0.6%. Northern Ireland has experienced the worst price falls, with the average cost of a home down by 9% over the past year while homes in Wales have lost 5.7% of their value and properties in East Anglia have fallen 5%.

London prices are down 2.3% over the year but in the past three months have been falling at a similar pace to the rest of the country, Nationwide said.

Separately, figures from the Haart chain of estate agents suggested the big slide in the capital's housing market in the first few months of the year may be coming to an end as prices were down a modest 0.25% from May, having dropped 14% in the past six months. Russell Jervis, Haart's managing director, said: "Our data shows that price corrections have already happened and the market is now starting to stabilise, as it is underpinned by some strong fundamentals, such as the rental market and the increase in interest from first-time buyers."

London-based estate agents Cluttons said more forced sales were starting to appear in the capital.