House prices post biggest fall in two decades

House prices fell by 6.1 per cent over the year to June, the biggest annual decrease in at least two decades, Halifax said yesterday.

Prices fell by 2 per cent in June, following a 2.5 per cent drop in May, Britain's biggest mortgage lender reported. Halifax compares average prices over three months with those of the same period the year before, to smooth out volatility in the market.

June's average house price of £180,344 was the same as in August 2006, the bank added.

The Halifax figures added to the gloom in the property market. Last week, the Bank of England said mortgage approvals were at their lowest level since records began. On Wednesday, it said the cost of a two-year, fixed-rate mortgage was at its highest since February 2000.

Martin Ellis, chief economist at the Halifax, tried to lighten the mood by pointing out prices were 150 per cent higher than in 1998. "A strong labour market, low interest rates and a shortage of new houses underpin housing valuations," he said. "Our research shows the labour market is the key driver of the housing market. Employment is at a record high." Prices are falling after more than a decade of increases that have squeezed out first-time buyers, while soaring mortgage costs and household bills have hit the pockets of property owners.

Howard Archer, the chief UK and European economist at Global Insight, predicted a 15 per cent fall in prices this year, more than his earlier estimate of 12 per cent. "The downward pressure on house prices coming from very low activity, stretched buyer affordability and tight lending continues to bite very hard," he said. "Very low housing activity seems set to push house prices markedly lower over the coming months."

Last month, Halifax Bank of Scotland, which owns the Halifax, raised its forecast for falling house prices from 5 per cent to 9 per cent, although it warned the markets were uncertain and that prices could fall further.

Property sales have become a key indicator of economic confidence because rising prices make homeowners feel secure about their finances and therefore encourage spending. The slump in prices is now threatening to undermine economic confidence.

Ruth Stroppiana, the chief international economist at Moody's Economy.com, said: "Elevated borrowing costs and the deteriorating labour market outlook will also continue to weigh on housing demand in coming quarters. The weaker housing market is expected to weigh heavily on consumption-driven growth."

House prices are almost 10 per cent off last August's peak, the Halifax said, and have fallen by 8.5 per cent since 31 December. The consensus is for a further decline of about 10 per cent this year and a similar one in 2009. The most pessimistic observers expect a 30 per cent fall by the end of next year, or about 40 per cent when inflation is taken into account. David Miles, a former government adviser on housing policy, recently predicted that a "bear case" for the housing market, although unlikely, would see 3 per cent wiped off growth – enough to trigger a recession.