House prices plunge £18,000 in just two months... but mortgage hikes may have peaked

• Woolwich reduces cost of fixed rate deals for the second time in two weeks

The average asking price for a home has dropped by up to £18,000 since May, research reveals today.

Owners seem to have finally accepted they will get far less than if they had sold during last summer's peak.

The report from property website Right-move said that in the past two months the average asking price across England and Wales has dropped by £7,281 to £235,219.

This is two per cent below the average in July last year, and is the first time Rightmove has recorded an annual drop since it began in 2002.

The biggest losers are homeowners in the South East, excluding London.

The average asking price there was £316,521 in May, but fell sharply to £298,692, a drop of £17,829 or nearly 6 per cent in two months.

Rightmove warned anyone thinking of selling to act quickly and put
their house on the market for a 'realistic' amount, before prices fall even further.

But relief for mortgage holders could be on the horizon after one of the UK's biggest lenders announced today it was cutting its mortgage rates for the second time in two weeks, following a fall in funding costs.

Barclays lending arm The Woolwich is reducing the cost of its fixed rate deals by up to 0.32 per cent.

The group is the latest in a flurry of lenders to slash their rates following a fall in swap rates, upon which fixed-rate mortgages are based.

Lending giants the Halifax, Nationwide, Abbey and Lloyds TSB's mortgage brand Cheltenham & Gloucester have all cut their rates this month.

The downward trend is good news for hard-pressed borrowers, and suggests that the trend for lenders to repeatedly hike the cost of their mortgages due to the problems caused by the credit crunch may have peaked.

Ray Boulger, senior technical manager at John Charcol, said the mortgage market appeared to have stabilised.

He said: 'I think it is a sign that we have passed the worst in terms of interest rates, but we are not seeing any significant criteria changes.

'We do seem to have got to the stage where lenders have tightened criteria and put rates up enough to choke off demand.'

He said there was unlikely to be any significant loosening in firms' lending criteria until there was an improvement in liquidity in the mortgage market, which was unlikely to happen this year.

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The Woolwich is reducing its 10-year fixed rate loan by 0.32 per cent to 5.94 per cent, while three-year and five-year deals are being cut by 0.2 and 0.1 per cent respectively.

The group is also introducing a new lifetime tracker deal of 0.69 per cent above the Bank of England base rate, to give a current rate of 5.69 per cent, although it comes with a £995 arrangement fee.

The lifetime tracker deal is the lowest rate for a variable mortgage The Woolwich has offered since March this year, although the reductions to its fixed rate range only take the cost of these mortgages back to where they were at the beginning of June, before swap rates rose sharply.

The new rates are also only available to people who have at least a 40 per cent deposit.

Andy Gray, head of mortgages at The Woolwich, said: 'We have seen an improvement in the swap rates recently and have taken the opportunity to reduce our longer term fixed rates where we see customers can get the best value at the moment.'

The group added that it was now charging the same rate for mortgages taken out directly with it or arranged through brokers.

Yesterday, the influential Ernst & Young ITEM Club warned that the deteriorating economic outlook means house prices 'have significantly further to fall'.

In its quarterly report, ITEM predicts prices are likely to fall 16 per cent from their peak, with areas outside London hardest hit.

Peter Spencer, chief economist to the E&Y ITEM Club, said: 'We expect prices to drop by around 10 per cent through 2008 and a further 6 per cent through 2009.'

Mr Spencer said that house prices were still around 7 per cent above the level justified by the ' fundamentals' of demand and supply.

However, he believes the eventual fall will be much steeper than this because of the slump in confidence and lack of availability of mortgage finance.

The Rightmove website, which measures more than 120,000 asking prices, or about 90 per cent of the market, said it has never witnessed such a sharp fall in prices.

It added that there there is a record number of homes on the market, but that they are simply not selling.

The average number of 'unsold properties' is now 77 per estate agent.

This is despite a 20 per cent drop over the last year in the number of owners deciding to put their home on the market.

Official figures show that the number of people managing to get a mortgage fell to 42,000 in May - the lowest level since official records began.