Housing market gloom deepens after annual prices fall for the first time in 12 years

The cost of a home fell for the sixth month in a row during April, sliding by 1.1 per cent, according to the Nationwide building society.

The building society released the figures as one of the "Big Five" banks announced it was cutting interest rates on some new home loans in a dramatic reversal of the mortgage squeeze.

Royal Bank of Scotland (RBS), which owns NatWest, announced a reduction of up to 0.3 per cent on fixed-rate deals at a time when the market for new loans appeared locked in an upward spiral.

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The average home in the UK now costs £178,555 - £1,759 less than 12 months ago.

The drop is in complete contrast to the way house prices have rocketed in the past five years - growing over that period by 45.5 per cent.

Nationwide's chief economist Fionnuala Earley said: "April was another difficult month for the housing market. Falling levels of market activity meant that prices fell by 1.1 per cent during the month and ended up one per cent lower than this time last year.

"April's fall in prices continues the trend of the last six months and reflects the weakening sentiment in the market brought about by poor affordability and tighter financial market conditions."

But she stressed that the current situation was different to conditions leading up to the 1990s house price crash.

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The figures are the latest in a line of gloomy data on the property market, with Halifax reporting price falls of 2.5 per cent during March, the biggest monthly drop since 1992.

RBS's move to cut some of its rates follows the Bank of England's decision to pour £50billion into UK banks.

And it came as a member of the Bank's interest rate-fixing committee said house prices may have to fall by a third in the next three years.

Although governor Mervyn King told the Commons Treasury Select Committee yesterday that the £50billion scheme was not designed to kick-start the mortgage market, the decision by RBS-NatWest could be the first sign that it has.

From today the cost of a five-year fixed rate mortgage for someone with a 25 per cent deposit will fall by 0.3 per cent to 5.89 per cent, a saving of £335 a year on a £150,000 mortgage.

The two-year tracker rate will fall 0.1 per cent to 6.24 per cent, a saving of £112.

The move was expected to generate a rush of applications from frustrated house buyers, although the bank's hefty £999 arrangement fee will deter many.

Paul Geddes, chief executive of consumer banking at RBSNatWest, said: "While 2008 has seen a shrinking mortgage market, we have increased the amount we have lent by 18 per cent and plan to continue this trend for the rest of the year."

Before yesterday, all the news on mortgages had been grim, with finance giants imposing drastic restrictions on the type and number available.

Deals were withdrawn, rates increased and buyers were forced to put up bigger deposits than previously required.

Last night David Blanchflower, a member of the Bank's Monetary Policy Committee, said rates needed to be cut urgently to avoid a recession.

In an Edinburgh speech he said: "In my view a correction of approximately one third in house prices does not seem implausible in the UK over a period of two or three years."

He said such declines would be necessary to bring values back into line with people's earnings.

"I am not suggesting that such a drop will necessarily occur, but it may," he went on.

"Cutting interest rates now may help to prevent such a dramatic fall."

Mr Blanchflower is the most pessimistic member of the Bank's committee, because he is worried that Britain could suffer a US-style economic downturn.

The depth of the crisis was brought home by Bank of England figures yesterday.

Just 64,000 loans were approved for people buying a house during March, 44 per cent fewer than the same month last year and the lowest figure on record.

Total mortgage approvals in the first three months of 2008 were at their lowest since 1992 - the last house market collapse.

The Bank of England rescue enables lenders to swap existing mortgage advances for gold-plated Government bonds which can be used as collateral to raise money to fund financial products, such as new mortgages.

Mr King said the plan was to encourage banks to begin lending to each other again and ensure the availability of mortgages returns to normal.

He told MPs: "This system is to help with liquidity in the banking system and restore confidence. It is not designed to kickstart the mortgage market and it's a mistake to go to where the market was a year ago.

"There was a need for a readjustment in the mortgage market but I do think the confidence in the system will return and feed through to borrowers and we will see the mortgage market return to operating normally."