House prices fell for another straight month in December, according to the latest figures from the Nationwide Building Society.
Nationwide says house prices fell 0.5 per cent this month, on top of a fall of 0.8 per cent in November, taking the annual rate of increase to 4.8 per cent, compared with 6.9 per cent in November and 10.5 per cent in December 2006. The annual rate of increase is the lowest since May 2006.
Halifax bank recently reported three months' worth of falling prices. A flat market next year is forecast by the Nationwide, in line with major lending organisations. Taking into account inflation, that would imply a real reduction in real estate values of about 2 to 3 per cent for the first time since the housing recession of the early 1990s.
Although economists differ on how much effect house prices have on spending, output and employment in the "real economy", a rapidly cooling property market will not boost consumer confidence.
Despite the enthusiasm for the sales season, most surveys put shoppers' morale at decade lows. Data this week from the British Bankers' Association and the Bank of England confirmed housing-based activity is slowing, with new mortgage approvals down more than 40 per cent on the year and a drop in the withdrawal of equity from residential property.
Malcolm Barr, UK economist at JP Morgan, said: "What is striking is how rapid the change in the pricing environment has been. The combination of elevated levels of prices, prior rate hikes, and the credit crisis appears to have crystallised a rapid realisation among housing market participants that transactions will now only occur with a price concession."
The housing market faces a squeeze. News of house-price falls will itself lead to buyers waiting for values to decline further and affordability to increase, especially with the near-promise of further interest rates cuts by the Bank of England through 2008.
The slowdown in growth in the economy and the predicted need to rebuild overstretched household balance sheets by paying off debt will also be depressing factors. Higher energy, food and public transport costs will also hit disposable incomes and eat into the possibilities of trading up for some.
On the supply side, the disappearance of the "sub-prime" sector and the imposition of much tighter lending criteria by lenders (already explicitly announced in the case of the Nationwide) will restrict the flow of funds pouring into the property market.
The BBA has detected the first signs the credit crisis is starting to be felt in UK households, and anecdotal evidence about the declining availability of credit cards and other lending suggests banks are quietly cutting down on their exposure to people with less than immaculate credit histories.