Don't panic, says Brown – as experts fear housing crash

The Prime Minister sought to allay fears of a full-blown property slump after the country's biggest lender revealed an average price drop of 2.5 per cent during March – the biggest monthly fall since 1992.

And figures from the Edinburgh Solicitors' Property Centre showed the capital was not immune to the effects of the global credit-crunch, with price-growth at its lowest rate in 15 years.

Experts said that the gloomy data made it "much more likely" that the Bank of England would cut interest rates at a crucial meeting tomorrow, in a bid to ease a growing mortgage crisis. Figures showed the uptake of mortgages was at its lowest since records began, while the last mainstream lender to offer 100 per cent mortgages withdrew the product.

In yet another bad sign for the economy, the Nationwide building society said its own survey of consumer confidence recorded a new low.

Halifax, the UK's biggest mortgage lender, said house prices were now just 1.1 per cent higher than they were a year ago – the slowest rate of annual growth for 12 years and signifying a fall in real terms.

The group said homes had lost 1 per cent of their value during the first quarter of 2008, leaving the average UK property costing 191,556. Although Scotland saw an annual 5.3 per cent rise, the boost for the most recent quarter was just 0.2 per cent.

Andrew Rettie, a partner in Strutt and Parker, said drops north of the Border would be lower because Scotland had not experienced the same boom as certain parts of England over the last five years.

He said at the top end of the market – 1 million-plus – there was a lot of activity in Scotland, but this dropped off at the lower price-brackets. This is because those buyers at the lower end of the market need to borrow more cash and the lending facility is not always there because of the impact of the credit crunch on banks.

The health of the housing market plays an essential role in the overall wellbeing of the economy. When lenders tighten up their criteria and repayments are heavier, borrowers have less to spend elsewhere.

As unease deepened, Mr Brown urged caution, saying: "We've seen house prices rise by about 180 per cent over the last 10 years and they have risen by about 18 per cent over the last three years, so a 2.5 per cent fall is something that is containable."

However, analysts at Capital Economics said the overall downturn was likely to continue, with a drop of 5 per cent by the end of the year and a further 8 per cent reduction by the end of 2009.

Seema Shah, a property economist with the firm, said: "We are definitely seeing the start of a crash comparable to the one seen in the 1990s. This is a very difficult point for the housing market and there doesn't look like there is anything that can revive it at the moment. It is not currently our forecast for a full-blown recession but the risks are on that side rather than to a recovery."

Howard Archer, chief UK and European economist at Global Insight, said there was a "very real danger" of a drop of more than 20 per cent over the next couple of years. He said: "The overall impression is that house prices were buckling markedly under the substantial pressure from increased constraints and tighter lending conditions even before the latest escalation of the credit crunch."

He said this heightened the pressure on the Bank of England to cut interest rates by a further 0.25 per cent to 5 per cent.

The squeeze means that lenders are raising their rates, reducing the loan-to-value ratios and pulling deals that are attracting too much business.

This is reducing demand as people, particularly those with impaired credit histories, struggle to get a mortgage. It is also limiting the amount people can borrow.

Yesterday, Abbey, the final mainstream lender offering 100 per cent mortgages, confirmed it had axed the deals.

Bristol and West also dropped similar deals, and the Council of Mortgage Lenders reported that the number of mortgages taken out had fallen for the fourth month in a row during February. It had hit a new low of 49,000 – a drop of 30 per cent year on year.

The Nationwide consumer confidence index has sunk to the lowest level since it was first launched in May 2004.

As well as the weakening property market, uncertainty in the financial markets and concerns about the economy took their toll on consumer sentiment in the index.

Fionnuala Earley, Nationwide's chief economist, said: "Consumers may begin to feel more comfortable following the expected cut to rates this week, but it is unlikely that confidence will increase in the short term."

However, Martin Ellis, Halifax chief economist, called for calm, pointing out that a property crash was not necessarily imminent as there were fundamental differences between today's economic climate – with a strong labour market, low unemployment and a growing economy – and that of the 1990s.

He added that low interest rates and a shortage of new homes being built would also help to underpin current housing valuations, although the group expects the number of homes changing hands to fall by 30 per cent this year.

Meanwhile, the Bank of England said yesterday it would inject an extra 5 billion into money markets – as the International Monetary Fund warned the credit crunch could cost global financial institutions almost $1 trillion (508 billion). The Bank will now offer 15 billion in next week's three-month "money auction", in its latest attempt to ease the credit squeeze.

The IMF predicted that losses worldwide could soar from around $193 billion (98 billion) currently to $945 billion (480 billion) or more.

The warning comes just days ahead of Washington talks among ministers from the Group of Seven (G7) where the credit crisis will be high on the agenda.