House prices have fallen at the fastest monthly rate since records began in 1991, the Nationwide house price index has revealed.
According to the research, the average house price fell by 2.5 per cent in May, the seventh consecutive monthly drop in prices and the longest period of falls since 1992. Consequently house prices are now 4.4 per cent lower than they were this time last year.
The average UK house now costs £173,583, almost £5,000 less than the average for April. The news comes amid rumours that the UK could soon face another recession, as the housing market is heading towards its fragile state of 1992.
Nationwide's chief economist, Fionnuala Earley commented on the results: "The pace of house price falls accelerated in May as more weak economic news added to the gathering momentum of negative sentiment about the housing market."
However, Ms Earley added that as a result of the house price boom which climaxed late last year, house prices remain 5 per cent higher than last year and 10 per cent higher than three years ago.
The credit crunch currently hitting consumers is thought to be a direct result of the sub-prime mortgage
crash which began in the US. Ms Earley added: "Problems in credit markets have clearly been the trigger for changing fortunes in the housing market.
"While it is never wise to place too much weight on one data point, the apparent speed of the adjustment may lead the MPC to look more closely at the balance of risks to inflation in the medium term."
Commenting on the need to control increasing inflation, she added: "Stronger than expected inflation appears to have shattered hopes of an early rate cut in the Bank Rate in June, but more downbeat economic and housing market data could lead more MPC members to join David Blanchflower in voting for pre-emptive cuts."
According to research, it is not just house prices that are falling, the Bank of England reported an 11 per cent monthly drop in house purchase approvals and the Nationwide Consumer Confidence Index for April showed a drop in consumers' house price expectations.
However, despite the gloomy figures, Ms Earley attempted to reassure consumers, saying: "Current market conditions inevitably lead to comparisons with the last episode of falling prices. However there are a number of reasons to believe that today's borrowers are better placed to weather the storm than in the 1990s."
According to Ms Earley, the tightening of mortgage criteria has actually helped to put borrowers in a stronger position than they were in the 1980s. Lenders are demanding larger deposits and lower loan-to-value (LTV) rates meaning borrowers owe less and stand more of a chance during a recession.
"Tighter credit conditions in the market at present are making it more difficult for borrowers to obtain loans at higher loan-to-value ratios. While this is frustrating for those in that position, more stringent underwriting criteria should ultimately lead to fewer overstretched borrowers and hence a more stable and sustainable market." Ms Earley concluded.