House prices show further slump

Prices dropped by an average of 0.8 per cent this month, according to Nationwide, reversing a 1.1 per cent jump in October. The last time values fell so sharply in a single month was June 1995.

The Nationwide figures add to a growing body of evidence that the great housing boom is finally over and that a prices slump is on the way. The Land Registry said yesterday that property values in London dropped 0.6 per cent in October.

City bookmakers Cantor Index said this week its clients were predicting a fall in London prices of 10 per cent by 2010.

Nationwide said the annual rate of increase fell from 9.7 per cent in October to 6.9 per cent in November. The average price of a home in the UK is now £184,099, down almost £2,000 in a month but still up £12,000 on a year ago.

The building society said all indicators pointed to a further slowing in the market as buyer sentiment continues to weaken and the final phase of the introduction of home information packs from next month hits the supply of smaller properties.

There are also growing fears that the credit crunch in financial markets is leaving banks struggling to find the cash to finance new mortgage applications.

The price at which banks borrow from each other hit 6.59 per cent yesterday - a level not seen since the Northern Rock crisis. The world's money markets effectively closed for business in mid-August, leading to the run on Northern Rock a month later and its emergency bail-out by the Bank of England.

The raised borrowing costs have dealt a severe blow to smaller lenders who have few alternative financing options, according to the Council of Mortgage Lenders.

Jackie Bennett, head of policy at CML, warned City bankers it was wrong to think banks' retail deposits could cover any shortfall in wholesale funding for mortgage lending. "There is not enough retail funding around about to fund mortgage markets if the capital markets do not open next year," she said.

Savers have put about £6billion a month into banks and building societies during the last year but mortgage lending has averaged around £9.5 billion a month. The shortfall is stretching banks' balance sheets severely and threatens to drive up mortgage costs and make home loans harder to obtain.

Fionnuala Earley, Nationwide's chief economist, said: "House prices fell by 0.8 per cent in November, reversing October's surprisingly strong performance. This is back in line with the softening trend we have seen in the second half of the year and fits our forecast of house price growth of between five per cent and eight per cent in 2007.

"Poor affordability, weaker house price growth expectations and the effect of earlier increases in interest rates have all affected demand in the market," she said.

Nationwide highlighted how quickly City traders had dropped their hopes for house prices. "New data from derivative trading in the City shows that in the space of just one month expectations of house price growth over the next year have fallen from minus two per cent to minus seven per cent without there being any real change in the underlying housing market conditions during the period."