London still leads house price rises amid slump fears

The latest figures from Nationwide building society put annual house-price growth in the capital at 12.8 per cent - down from 16.5 per cent year-on-year growth three months ago.

The slump in the fourth quarter of last year came amid predictions that a possible recession in America could spill over into the rest of the world economy.

Rising costs of fuel, food and mortgages have left home-buyers nervous about paying top prices and analysts predict the slump is likely to get worse. The collapse of Northern Rock has also hurt confidence.

In the last three months of the year house prices rose by 1.2 per cent in London compared with 3.3 per cent in the previous quarter.

Although this shows that London is stumbling, it is still above the national average of one per cent growth for October, November and December. The US subprime mortgage crisis that saw many borrowers encouraged to overstretch themselves in pursuit of a dream home has left banks across the world nervous.

They have written off many billions of pounds to cover losses from bad loans and are now tightening lending procedures, making it harder for home-buyers to raise the money they need.

Economists say the knock-on effect on house prices is only beginning to be felt.

Both Nationwide and arch-rival Halifax reported that house prices actually fell last month across Britain by 0.5 per cent - the second consecutive monthon-month dip.

Fionnuala Earley, Nationwide's chief economist, said: "The housing market has weakened significantly in the closing months of 2007 after holding up more strongly than expected in the earlier part of the year. As funding conditions have tightened and risk aversion has risen among banks, there has been a decline in the availability of mortgages at the riskier end of the spectrum and an increase in their price."

The Bank of England could cut interest rates next week in an attempt to steady the economy. This would reduce monthly mortgage costs for many people, but may do little to rescue the housing market itself.

The average price of a UK house is now £184,000, with those in the South typically £90,000 more expensive.

The North-South gap in house prices rose by £15,000 last year alone. Figures out yesterday from the Land Registry put the cost of an average central London home at £356,000.

Northern Ireland is also starting to feel the slowdown. Prices in the province are now rising 24.2 per cent a year, down from 42.6 per cent in the third quarter.