House price growth falls to seven-year low as economy continues to slow down

The Land Registry said house prices in England and Wales had increased by just 1.8% during the year to the end of May, the lowest rate since its records on monthly changes began in April 2001.

But the average cost of a home remained unchanged during May at £183,266, following falls during the previous three months.

Stalling: Property prices are growing at the slowest rate since records began in 2001

The figures also showed the number of homes changing hands had halved during the past year, with transaction volumes for March, the most up-to-date figure available, 50% lower than 12 months earlier at 53,080.

There was also a 45% drop in the number of properties being sold for more than £1 million, with just 357 homes changing hands for at least a seven figure sum during March compared with the same month of 2007.

The Land Registry index continued to show big regional variations, with the East Midlands seeing price rises of 1.1% during May, while the average cost of a home rose by 0.9% in both the East and Yorkshire and the Humber and by 0.8% in London.

But other areas saw steep price falls, with property values sliding by 2.4% in the North East during the month, and dropping by 2% in the South West and 0.5% in the North West.

Annual house price growth is now negative in four areas of the country, with the North East seeing the biggest year-on-year fall of 1.3%.

London continues to have the strongest annual house price inflation at 6.9%, with the East having the next strongest growth at half this level of just 3.3%.

The latest figures add further to the gloomy news on the property market as the credit crunch continues to exacerbate the current downturn.

Earlier this week the British Bankers' Association said mortgage approvals for house purchase had dived by 20% during May to reach a record low of 27,968, 56% lower than in May 2007.

The problems in the housing market look set to continue to worsen, with the average cost of a fixed rate mortgage breaking through the 7% barrier earlier this week to stand at its highest level for 11 years, further worsening already stretched affordability.

Meanwhile there were fresh signs of financial woe today as figures revealed the UK economy grew more slowly than first thought in the opening three months of the year.

The Office for National Statistics (ONS) revised its original estimations for GDP growth in the first three months of the year down to 0.3% from 0.4%.

The economy is now growing at is slowest rate since the first quarter of 2005, when GDP sat at 0.2%.

Annual growth has also been revised down to 2.3% from 2.5%, the ONS said.

The gloomy news follows Bank of England Governor Mervyn King's grim assessment of the economic challenges facing the UK in a hearing with MPs yesterday.

The official inflation benchmark hit a record 3.3% in May and is expected to top 4% later this year.

Mr King - who has said the UK faces its biggest challenge for two decades - warned there was no "magic bullet" to protect the economy from soaring inflationary pressures.

Today's figures from the ONS show that first-quarter growth was hit by weak service sector output, up only 0.3%. The business services and finance sector saw its poorest performance for nearly five years as the credit crunch continued to take its toll.

The proportion of money set aside by UK households has also slumped to its lowest level since 1959 and fell further in the first quarter.

The household savings ratio fell to 1.1% in the first quarter from 3.3% in the final three months of last year as household disposable income growth came under pressure.

Economists at Royal Bank of Scotland said households' finances appear to be in a "more precarious state", with a surge in tax payments earlier this year compounding cost pressures from inflation and the credit crunch.

Howard Archer, chief economist at Global Insight, said there was "undeniably a very real and growing danger that the economy could suffer a mild recession".

But he added that the weakness in the economy may help to ease inflation back.

"We still lean towards the view that extended weak economic activity, and rising unemployment, will contain, and then increasingly dilute, underlying inflationary pressures, thereby enabling the Bank to hold off from raising interest rates," Mr Archer said.