The reality crunch: Families slash spending, experts warn of mortgage meltdown and NOW job threats loom

Families are cutting spending and dipping into savings because money is so tight, according to reports released yesterday.

Nearly 60 per cent of adults said they will have to make sweeping economies over the next 12 months.

And it is not just life's luxuries, such as foreign holidays and socialising, that face the chop. One in four said they were going to try to cut their weekly food shopping bill.

The report, from the financial comparison website MoneyExpert, shows how the credit crunch is biting.

The gloom is deepening for millions who had pinned their hopes of prosperity on rising property prices. Nationwide, the biggest building society, said yesterday that the price of the average home had fallen by nearly £7,000 since October.

Experts fear there is worse to come. One said the mortgage meltdown could cause prices to plunge as much as 30 per cent over the next three to four years.

Many homeowners are also seeing the cost of their mortgage going up and are finding it more difficult to borrow money on credit cards or by taking out a loan.

Sean Gardner, chief executive of Money-Expert, said: "The credit crunch is moving on from being something that just affects bankers to having real effects on real people in the real economy."

Another report, from the Post Office, showed how a lack of spare cash is driving many to raid their savings accounts.

Half of those who put money into a savings account at the beginning of the month are having to withdraw it by the end of the month, the survey said.

These "savings bouncers", as the Post Office calls them, are suffering from increasing daily living costs with energy, food and petrol rising at the fastest rate since records began.

Financial advisers encourage regular monthly savings, but the harsh reality of soaring bills and below-inflation pay rises mean this is not always possible.

One in five of those surveyed admitted to "bouncing" every month and nearly five million say they "simply cannot afford" to make regular savings.

The biggest losers are the elderly because inflation is much higher for them than it is for the rest of the country, according to another report.

This is largely because they spend more of their money on energy and food - both of which have risen sharply recently, said Home & Capital, an equity release firm.

The Nationwide's latest monthly house survey found that the average price dropped 0.6 per cent this month to an average of £179,110.

That means prices across the country have fallen for the last five months by a total of 3 per cent.

Ed Stansfield, of City analysts Capital Economics, had originally predicted a 5 per cent fall this year and 8 per cent next year.

But yesterday he warned that the mortgage meltdown could make a bad situation even worse.

Mr Stansfield said: "There is a growing risk of a sharper and deeper adjustment. Hopes that the housing market is experiencing little more than a short-term wobble look increasingly forlorn."

Cheap mortgage deals are disappearing every day as banks and building societies continue to feel the squeeze. Alliance & Leicester will today become the latest lender to axe one of its deals when it withdraws its 4.99 per cent two-year fixed rate mortgage after being flooded with applications from desperate homebuyers.

The gloomy outlook was shared by other economists.

Howard Archer, of Global Insight, another firm of City analysts, said his original prediction of a 5 per cent fall this year and next may also prove too optimistic. He added: "The risks are mounting of a sharper drop."

Nationwide's chief economist Fionnuala Earley said one of the biggest factors in the market was "a clear change of sentiment".

Over the past decade, buyers rushed to get on to the housing ladder because they believed - correctly - that prices were going up.

Today, many fear the opposite is more accurate, and are abandoning plans to buy unless they have no choice.

Figures from the Bank of England showed this week the number of people taking out a loan to buy a home has plunged by a third over the last year. With no buyers, sellers have to cut their prices to have any hope of moving.

The other big fear is unemployment. Economists are worried that prices will plummet if thousands of workers start losing their jobs and are forced to sell their homes.

Mr Archer said rising unemployment "would be liable to lead to a marked increase in the number of people having to sell houses for distressed reasons, particularly given the extent to which many households have had to stretch themselves to the limit to buy a house".