House price bombshell

One senior commentator said prices could fall by more than 20 per cent over the next two years, putting the downturn on a par with the negative equity and repossessions crisis of the John Major years.

The 2.5 per cent fall in the Halifax index last month is the worst since September 1992 when property prices crashed. Up until today, Halifax was predicting prices would remain steady.

It was far more drastic than the 0.5 per cent decline feared by City economists and piles pressure on the Bank of England to cut interest rates on Thursday.

Analyst Seema Shah at Capital Economics described it as a "stunningly large drop", adding: "There is a clear risk that this housing market correction will be sharper and deeper than we currently expect."

Howard Archer, chief UK economist at Global Insight, said of the 2.5 per cent fall: "This is a very worrying figure and it comes before the latest escalation of the credit crunch."

While warning about putting too much emphasis on one piece of data, he said Global Insight had increased its forecast for house price falls this year and next, adding: "Risks are mounting of a substantially sharper drop. Indeed, there is now a very real danger that a drop of more than 20 per cent in house prices could occur over the next couple of years."

It comes as the number of houses sold in London hit its lowest level for more than a decade with sellers forced to slash between £70,000 to £250,000 off asking prices.

Liberal Democrat T reasury spokesman Vince Cable said worse was yet to come. And he warned of an " epidemic of repossessions" unless the Treasury acts to make sure homeowners were offered help by lenders to make payments affordable.

"These figures confirm that the market was overvalued and due a painful correction. But we are only at the early stages of a market fall," he said. "The wheels are clearly coming off Brown's economic wagon."

But Gordon Brown insisted that the UK was "better prepared" to deal with the latest economic woes than it was 15 years ago when interest rates hit 15 per cent, inflation 10 per cent and unemployment was rising rapidly.

He told the BBC: "We've seen house prices rise by about 180 per cent over the last 10 years and they have risen by about 18 per cent over the last three years, so a 2.5 per cent fall is something that is containable." There was more bad news for the property market when Abbey became the last mainstream lender to stop offering 100 per cent mortgages. It means first-time buyers will have to come up with a deposit of around £10,000.

Hundreds of mortgage deals have been scrapped in the past week.

Lenders are desperate to avoid "high risk" borrowers with small deposits so the turmoil in the market has had a disproportionate impact on first-time buyers. As well as pulling its 100 per cent mortgages, Abbey increased the cost of many of its fixed-term and tracker mortgages. Borrowers will need a deposit of at least five per cent unless they have a parental guarantee.

An Abbey spokesman said: "This is normal given the current market conditions and is in line with recent moves by other lenders." Lenders such as Alliance & Leicester, Britannia and Cheltenham & Gloucester are demanding deposits of 10 per cent. Nationwide recently raised its minimum deposit for its best deals from 10 to 25 per cent - or £62,500 on an average £250,000 first-time home in London.

Melanie Bien, director at mortgage broker Savills Private Finance, said: "This is a huge blow for first time buyers struggling to get on the housing ladder. Despite falling house prices in some areas, it is still extremely difficult for first-time buyers to save up enough of a deposit to buy their first home.

"The liquidity squeeze is encouraging lenders to opt for low-risk business over higher risk, and that means attracting people with big deposits or significant equity in their home."

Housing Minister Caroline Flint announced that the Treasury was calling in the Council of Mortgage Lenders to discuss action that needs to be taken. She said: "We have to make sure we keep our eye on what is happening."

But the council added to the gloom when it reported the number of home loans issued has slumped to its lowest for 16 years.