Page last updated at 10:45 GMT, Thursday, 29 May 2008 11:45 UK

House price falls at new record

Nationwide branch
The Nationwide's own lending has fallen by 40% in the past year

UK house prices have recorded their largest monthly fall since 1991, says the Nationwide building society.

Prices have fallen by 2.5% during May, according to its latest monthly survey. The lender said prices were now 4.4% lower than a year ago, a drop of 8,000, which has taken the average UK house price down to 173,583.

The Nationwide, the UK's second-largest lender, said seasonally adjusted price falls were now accelerating and had continued for seven months in a row.

"The pace of house price falls accelerated in May as more weak economic news added to the gathering momentum of negative sentiment about the housing market," said Fionnuala Earley, the Nationwide's chief economist.

"At seven months, this is also the longest consecutive period of monthly falls since 1992," she added.

Low point

The Nationwide pointed out that its survey chimed closely with much of the other recent evidence about the state of the UK housing market.

A much smaller proportion of borrowers face the full effect of falls in prices than was the case in the 1990s
Fionnuala Earley, Nationwide

In March, new mortgage approvals for home buyers were at their lowest since the Bank of England's records on the topic began back in 1993.

And recently, estate agents have reported that falling prices have been at their most widespread across the UK since 1978.

Despite this, Ms Earley argued that the market was not heading for the same sort of crash as that seen in the early 1990s.

"First, fewer homeowners bought at the top of the market in this cycle," she said.

"This means a much smaller proportion of borrowers face the full effect of falls in prices than was the case in the 1990s.

"Secondly, today's borrowers have typically put down a larger deposit than their 1980s counterparts," she added.

Further falls

Monthly price movements can be volatile.

House price graph

But the accelerating pace of the decline in property prices is shown by the fact that in the past three months they were 2.9% lower than in the previous three months.

At the start of the year that three month-on-three month comparison showed a drop of just 0.9%.

Ms Earley said that Nationwide was continuing to forecast single-digit house price falls during 2008.

But if the prices fall in the rest of 2008 as they have done so far this year, then prices will end the year down by 13%.

Howard Archer, chief UK economist at Global Insight, painted a gloomy picture for some homeowners.

"It now looks more likely than not that house prices will suffer double-digit falls both this year and in 2009," he said.

Good news?

After a boom lasting for more than a decade, house price inflation took a decisive turn downwards last autumn.

The market turned under the impact of two main pressures.

Prices became so high that most first-time buyers were priced out of the market, and the effects of the credit crunch dried up the supply of money for new mortgages.

The recent fall in house prices should be good news for many would-be home owners who have been priced out of the market.

With take-home incomes still rising, despite the economic slowdown, house prices are slowly becoming more affordable.

However, lenders are also demanding much higher deposits than before as they seek to ration their lending.

Despite the efforts of the Bank of England to inject more money into the banking system, banks and building societies are now expecting that fresh mortgage lending will shrink by about 40% this year.

The many potential buyers still locked out of property ownership are having to rent instead.

The Royal Institution of Chartered Surveyors recently reported that this was continuing to push up the demand for rented properties.

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