Builders on slide after 'worse than Nineties' warning

Projects on new homes have been shelved as building firms struggle to find buyers for the properties.

Kate Barker, who is the Bank's monetary policy committee's lead expert on housing, said: "I don't think it's particularly good news. Conditions are different to the 1990s. The housing market adjustment is more severe than in the 1990s, because it looks as though the fall in house construction this year may be on a scale that it took almost six years to achieve in the 1990s."

Her remarks were backed up by Governor Mervyn King, who told the Treasury Select Committee that house buying and selling transactions will slow markedly.

"We are likely to see a period of extremely weak activity,î he said. "The time over which these [price] adjustments will take place is almost impossible to judge."

Barker explained that today's falls in price could help: "There is one sense in which I think it might be helpful, which is prior to these declines there was probably some element of speculation in the housing market, particularly with buy-to-let."

Fellow MPC member Tim Besley said falling house prices had put an end to the buy-to-let market and it was "unlikely to begin again anytime soon". Shares in building firms had already taken a knock today after broker Credit Suisse told its clients once again to "avoid the UK housing sector".

Its revised forecasts predicted prices to fall 10% this year with volumes of new sales down 30%. In 2009, it predicts 10% falls in both prices and volumes of sales.

The British Bankers' Association said earlier this week that the number of mortgages approved collapsed by 58% on a year ago. Now analysts fret that the companies will be forced into writing down the value of their land and sell new shares at a big discount to raise cash.

Immediately after the bankers' testimony, Barratt Developments, Persimmon and Bellway shares were all down more than 5%. Berkeley, Brixton Estates and Bovis Homes were more than 2% lower.