In a further blow to an already enfeebled property market, the Nationwide Building Society said yesterday that house prices fell by 1.7 per cent last month alone, on top of a 0.8 per cent drop in June.
The annual rate of decline has accelerated from 6.3 per cent last month to 8.1 per cent. Property values are falling at their fastest rate for at least 18 years and have registered nine consecutive months of decline.
Some £15,000 has been wiped from the value of the typical British home, which now stands at £169,316. Estimates published recently by the Standard and Poor's credit agency suggested that 1.7 million homeowners – about one in seven – could soon find themselves in negative equity, sitting on a paper loss of about £12,500.
The continuing credit crisis has seen banks and building societies tighten their lending criteria and remove hundreds of mortgage offers from the market. The number of mortgage approvals is 70 per cent down on last year, according to the Bank of England. For those who succeed, the effective cost of a mortgage has risen, despite cuts in official interest rates.
Despite some recent signs that the credit crunch may be easing slightly, the flow of funds into the housing arm has almost dried up, and sentiment is at a low ebb. A recent review of mortgage financing conducted by the former chief executive of Halifax/Bank of Scotland, Sir James Crosby, for the Treasury, had few suggestions for improving matters.
Fionnuala Earley, the chief economist at the Nationwide, commented: "The latest batch of economic news has been fairly poor. GDP estimates for the second quarter show a slowing. Retail sales collapsed in June. Inflation remains well above target and is expected to continue to rise this year, and the labour market is also showing signs of deteriorating. The risk of an economic recession in the UK is clearly rising."
While banks are less willing to lend, there is also some anecdotal evidence suggesting that homebuyers are becoming less willing to borrow. The gloomy news surrounding the sector is encouraging some buyers to bide their time in the expectation that prices will fall further and the availability of mortgages will improve.
There is also the fact that, even with such a rapid cooling, house values remain close to their record highs, having trebled over the past decade. In terms of their relation to average incomes, house prices are still at levels that rule out many people.
The Nationwide did detect some good news, however. Ms Earley said that market interest rates were starting to ease, and pointed to the relatively small scale of forced selling as a hopeful development.
"As the cost of mortgages begins to come down, activity could be bolstered and restore some liquidity to the housing market. However, this is not likely to happen overnight. Overall, the weakening economy and poor housing arm sentiment do not suggest that the market will recover quickly," she said.
Howard Archer, the chief economist at Global Insight, added: "It seems unlikely that the Bank of England will cut interest rates in the near-term at least. Indeed, it is very possible that the Bank's next move could be to raise interest rates."
The Bank's Monetary Policy Committee will announce its next move on rates next Thursday.
£169,316 The price of the average British home, down £15,000 in just nine monthsReuse content