House prices are rising at the slowest rate for 12 years in a blow that could force the Bank of England to bring forward an interest rate cut to April, Britain’s second-biggest mortgage lender said today.

Figures from the Nationwide showed that the price of a typical house dropped this month by 0.6 per cent — or nearly £250 — to an average of £179,100.

The decline means that the annual rate of house price inflation is 1.1 per cent, the lowest since March 1996.

Fionnuala Earley, group economist for Nationwide, said it was clear that there was a “sharp slowdown” in house prices.

She said: "The outlook for UK house prices is clearly more downbeat. Some of the downside risks we idenitfied in November have become a reality — most notably the continued turmoil in the financial markets."

She added that the collapse of Bear Stearns in the US and the rumours over the health of HBOS was likely to force the Bank of England to put aside fears over inflation and cut rates next month to "loosen conditions in financial markets".

A survey reported yesterday suggested that inflation could spiral to 3.6 per cent over the next 12 months.

Ms Earley said: “We think these latest developments, along with the continued weakening in the housing market, will mean that the [Bank of England] will bring forward its rate cut to April.”

Howard Archer, chief economist for Global Insight, gave warning today that there was the real possibility of a "sharp correction" in the property market.

He has been predicting a 5 per cent fall in both this year and next.

Mr Archer said: "We believe the downside for house prices will be limited to some extent by the rising number of households, an overall shortage of supply, high employment, further gradual but steady interest rate cuts over the coming year and the fact that few vendors are currently having to sell for 'distressed' reasons.

"Nevertheless, the current escalation of the credit crunch means that there is an increased risk that a significantly sharper housing market correction could occur."

Nationwide was one of two big lenders to put up its mortgage rates yesterday to close the door to all but the most creditworthy customers in a move that is expected to leave tens of thousands of borrowers struggling to secure a home loan.

The building society raised the rate on one of its most popular products by 0.57 per cent and said that it did not want to take on many more customers because doing so would add too much risk on to its books.

Within hours of the announcement, Norwich & Peterborough Building Society said that it was increasing its mortgage rates by up to half a percentage point.

There are fears that if other lenders followed suit, the property market could slow further.

The number of first-time buyers coming to the market has slowed, with a third fewer mortgages taken out for house purchases last month than in February 2007.

One mortgage industry source yesterday said: "The credit crunch feels like a stomach bug for borrowers — periods of calm followed by nasty spasms. This is the start of a spasm."

Nationwide urged homeowners today to put the slowdown in the housing market into context.

Typical house prices are 11 per cent higher than two years ago and 47 per cent higher than five years ago — the equivalent of £30 a day for the past five years.

Ms Earley said: "If prices were to fall in line with consumers' expectations, they would still be higher than two years ago.

"A moderate fall in prices at this stage should not be unwelcome and should help to ensure greater stability in the market going forward."

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