House prices could fall 30% in biggest crash ever seen in Britain, key Bank of England member warns

The assessment from David Blanchflower, a member of the Bank's interest rate-setting committee, would mean about £55,000 being wiped from the value of the average home, currently £180,350.

At this level, house prices would return to the levels of 2003, a disaster for many who have bought in the last few years.

Plunge: A key member of the Bank of England warns house prices could fall by 30 per cent, the biggest ever crash in Britain

House prices have already fallen 8.6 per cent since January, cutting the price of the average home by nearly £17,000.

Professor Blanchflower's prediction in a newspaper interview is one of the most pessimistic about the fate of house prices. His position as one of the nine individuals who decide interest rates each month means it will be taken seriously.

Before his forecast, the most negative outlook came from the consultancy Capital Economics. It has been warning house prices could fall 35 per cent by the end of 2010 from their peak in October last year.

It is not the first time that Professor Blanchflower has made such a warning. In a speech in April in Edinburgh, he said house prices in the UK were '30 per cent higher than justified by fundamentals'. He said: 'I am not suggesting that such a drop will necessarily occur, but it may.'

Such a house price fall would be disastrous for millions of homeowners, plunging them into negative equity, where the size of their loan is bigger than the value of their home.

Negative equity traps families in their homes. Many cannot sell because they would owe money to the bank which they could not afford to pay.

First-time buyers, however, who have been hoping properties will become more affordable will welcome the predictions. Professor Blanchflower, who joined the Bank in June 2006, is calling for interest rates to be cut sharply to avert a deep and painful recession.

Rates, currently 5 per cent, have been cut three times since December, but he thinks they should come down further.

He told the Guardian newspaper: 'I think we are going into recession and we are probably in one right now. We will probably have three or four quarters of negative growth but the risks are to the downside. It is not too late to stop it but we have to act right now. Monetary policy has been far too tight for too long.

'We can't just sit and do nothing as we have done for too long.'

The warning came as Capital Economics said it feared the mortgage drought could deteriorate further as banks struggle to find money to lend.

Just 42,000 borrowers were given a loan for a home purchase in May, according to the Bank of England  -  the smallest number since 1993.

It has emerged that plans by the Halifax to raise £4billion from shareholders had been a failure. Just 8 per cent of its backers took up the offer following a plunge in the bank's shares. It is a sign of the problems which other lenders may face if they want to raise money.

Without money, banks will continue to struggle to lend to homeowners who need to remortgage, or those who want to buy.

Mortgage rates have fallen in recent weeks. The average two-year fixed-rate loan, which had hit its highest level in more than a decade, has dropped back below 7 per cent, according to financial information firm Moneyfacts. It is now 6.96 per cent.

…Unless you own a £10m mansion

Big buy: Kensington Palace Gardens

The number of homes sold for £10million or more has soared 70 per cent over the past year, research has revealed.

The booming demand for the country's most expensive properties proves that the credit crunch is not hurting everyone.

The research, from estate agent Knight Frank, says 'super-prime' homes are one of the only bright spots in the crumbling housing market.

Between April and June, the number of 'mainstream' sales crashed 50 per cent compared with the same period last year. But sales at the most exclusive end of the property market - almost always in London - are riding high.

Knight Frank estimates between 50 and 60 homes were sold for £10million or more in the capital during that period. A £10million 25-year mortgage at a rate of 6 per cent would cost an incredible £64,500 every month.

Liam Bailey, head of residential research at the estate agency, said many of the super-rich buyers were making their money from oil.

He said: 'The oil price is going up which is hurting most people due to record petrol prices but many of these buyers are benefiting.'

Earlier this year Indian steel magnate Lakshmi Mittal bought Kensington Palace Gardens in West London for £70million.

In the super-prime sector, house prices are still going up, jumping 6.8 per cent since the start of the year. About 80 per cent of the buyers are foreigners, according to Knight Frank, with a quarter coming from Russia.