Nationwide: House prices plunge at fastest rate in 17-years

Fears over a radical correction in UK house prices have come one step closer with the publication of the latest house price survey from the Nationwide.

The average price for a property slipped by 2.5 per cent in May – the biggest single monthly drop in the survey's 17-year history.

As a result average house prices are down 4.4 per cent over the last year. This shows an acceleration of the trend begun last month, with prices down just one per cent over the year.

The average price of a property is now £173,583, down from the £178,555 recorded in April.

At seven months this is also the longest consecutive run of negative results recorded by Nationwide since 1992. However, at that time, annual prices were falling at a rate of 6.3 per cent.

However, Nationwide points out, given the unprecedented growth in the market over the last two years, prices are still five per cent higher than two years ago and ten per cent higher than three years ago.

It is also though tighter credit conditions in the present climate – which have seen banks cut maximum loan-to-value ratios and raise interest rates - will help the longer term sustainability of the market.

"Problems in credit markets have clearly been the trigger for changing fortunes in the housing market and while it is never wise to place too much weight on one data point, the apparent speed of the adjustment may lead the monetary policy committee to look more closely at the balance of risks to inflation in the medium term," commented Fionnuala Earley, Nationwide's chief economist.

The Bank of England has cut interest rates three times in the past six month – by 0.25 per cent in December, February and April – bringing the base rate to five per cent.

Commenting on the figures Russell Jervis, managing director of Spicerhaart said: "As prices have dropped, we are seeing an increased number of people looking to buy a property, but there are some stumbling blocks stopping motivated buyers from purchasing.

"More needs to be done to ensure the finance is there for buyers to borrow and that vendors can actually afford to sell. Encouragingly, some lenders have reduced their rates, and this trend needs to continue."

However, further cuts could be delayed by an increasing rate of inflation, with the consumer price index presently at three per cent – ahead of the government's target of two per cent.

In addition research released earlier this week by the British Bankers' Association finds the number of mortgages issued during April remains at a severely depressed level.

"The Nationwide data indicate the downward pressure on house prices coming from stretched buyer affordability and tight lending conditions is increasingly biting," explained Howard Archer, analyst with Global Insight.

"Elevated affordability pressures on potential house buyers stem from high house prices and modest real disposable income growth, while ongoing tight credit conditions are leading to significantly fewer and more expensive mortgages being available.

"Furthermore, potential house buyers now have to provide higher deposit levels, which is a particularly major problem for first-time buyers."

Chris O'Toole