The property market is due to suffer its worst year since the mid-1990s as houses fall in value across the country, Britain's biggest building society gives warning today.

Nationwide said that house price inflation would collapse from 9.7 per cent at present to precisely 0 per cent next year - below the expected inflation rate of around 2 per cent, meaning that prices will fall in real terms.

House prices would decline across much of England, but Scotland would have a relatively stable period of modest price rises

Its annual forecast for 2008 shows prices declining by 2 per cent in the North and the North West and by as much as 5 per cent in Northern Ireland.

Prices will fall in Yorkshire and Humberside, in the South West and in Wales and be will static across the Midlands and East Anglia, it predicts. London and the South East will see prices rise by a meagre 1 per cent - still a real terms cut. Nationwide predicts prices will rise by 4 per cent north of the border.

As the prospect of a slowdown in house prices heightened, nervousness about the economy kept the London Interbank Offered Rate (Libor) at a two-month high of 6.4 per cent, above the UK interest rate of 5.75 per cent.

The three-month rate at which banks lend money to each other rose to its highest rate since September 19 on fears that lenders are still facing exposure to the US sub-prime mortgage market.

The increase is in spite of yesterday's announcement by Barclays it has written off £1.7 billion of write-offs related to sub-prime assets in contrast to the £10 billion figure the City had been expecting.

Experian, the credit-checking group, said it expects its sales to slow as banks become more cautious on granting home loans to consumers in a bid to cut their exposure to the US mortgage market.

Research has shown that confidence in the property market has undergone a sea-change since the summer financial crisis.

The Royal Institution of Chartered Surveyors reported earlier this week that new properties have flooded the market as would-be sellers make a dash for the exits, with the number of homes on estate agents' books rising by 9 per cent in October.

RICS also said that prices were falling at their fastest pace in two and a half years, although other reports have yet to paint such a gloomy picture of conditions.

Mervyn King, the Governor of the Bank of England, said this week that house prices are clearly cooling after a period of unsustainable rises.

"We needed to get away from the period when we saw double-digit growth," he said. "We needed a cooling in the housing market; how far it goes remains to be seen."

Fionnuala Earley, Nationwide's chief economist, said: “Momentum is now fading, and a number of factors suggest that house price inflation will drop from its current rate of 9.7 per cent to 0 per cent by this time next year.

"The main reasons for this more subdued outlook lie on the demand side of the market, where a slowing economy, tighter credit conditions, stretched affordability for first-time buyers and lower house price expectations appear likely to reduce the level of activity.

"The supply-side of the market will still be characterised by widespread housing shortages, in spite of government targets to increase house building. These shortages will provide some offsetting support to prices amid the weaker demand environment, particularly in the south of the UK.”

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