The two main house price indices, published yesterday, both show prices are now lower than a year ago. It means the brief recovery during the summer has fizzled out.
The Halifax Building Society index indicates that prices are 1 per cent lower than a year ago, having fallen 0.1 per cent in November. Nationwide's index shows prices down 0.6 on a year ago with prices falling by 2.7 per cent in November.
Gary Marsh, the Halifax's housing economist, said: ''It beggars belief to think there won't be some recovery on the back of the improving economy. We are very concerned.''
Adrian Coles, director-general of the Council of Mortgage Lenders, said: ''There's little prospect of a recovery in prices next year,'' but added: ''I don't think prices will fall as they did in the early 1990s.'' He said prices were held down by a ''triple whammy'' of rising interest rates, the new social security rules and the planned reduction in mortgage interest tax relief to 15 per cent in April next year.
The Nationwide price index shows house prices have fallen by around 20 per cent since 1989. Rob Thomas, housing analyst at stockbrokers UBS, said: ''The Budget was not very helpful. The outlook is gloomy. Recovery has not been creating good full-time jobs.''
From April, under the Budget changes, the rules by which homeowners can recover half their mortgage interest costs through income support if they lose their jobs are to be tightened. And from October, people taking out new mortgages will not have any of their mortgage paid under the income support rules for nine months.
Brian Davis, chief executive of the Nationwide, said: ''People will be more cautious about taking on a mortgage, and lenders will be more cautious too. In the long term this will have an impact on the cost and availability of mortgages.''
John Wriglesworth, housing economist at the Bradford & Bingley building society, believes more buyers will be forced to buy mortgage insurance. This will add about 0.5 per cent to the monthly cost of a mortgage.
Interest rate rises could add the same again. The City expects the Chancellor, Kenneth Clarke, to raise interest rates within two months. It could come as early as next week.
The prediction of higher interest rates has already fed through to fixed-rate loans. At the begining of the year, five-year fixed rates were around 6.99 per cent. They are now just over 9 per cent.
Ian Darby, of mortgage brokers John Charcol, said much of the business was coming from existing homeowners remortgaging. ''It's a funny market. Property in the better areas is going quite fast, but the rubbish that everyone rushed to buy in the 1980s is sticking.''