House prices have suffered their first annual fall in 12 years and the pace of the month-on-month decline is accelerating. Mortgage lenders are reining in their lending and are unable to pass on to borrowers the vast bulk of the recent cuts in the Bank of England's base rate.

Yet Nationwide economists remain optimistic about the stability of the housing market.

In the late 1980s and early 1990s nearly 90 per cent of homeowners with a mortgage were on variable rate deals. That meant that the vast majority of households were forced to take on the chin a doubling of interest rates that occured in just over one year.

This triggered a vicious circle of forced sellers in a housing market where prices were sliding.

The Bank of England's base rate rose from 7.88 per cent in May 1988 to 14.88 per cent by October 1989, and remained there for a year. It was not until May 1992 that rates dipped below 10 per cent, and settled to just under 6 per cent a year later.

However, homeowners felt the pain for much longer as banks and building societies were slower to pass on the declines in base rates.

Building society basic mortgage rates rose from 10.24 per cent to 15.4 per cent between the summer of 1988 and the summer of 1990. They dipped below 10 per cent in April 1993 — a year later than the Bank's base rate. It was not until December 2001 that building society rates sank below 6 per cent.

Today, Nationwide explains that only 17 per cent of mortgages are repayable on the standard variable rate set by banks and building societies. Yes, it also will be difficult for some 1.8 million borrowers coming off short-term deals this year to find a similarly-priced cheap deal. They will face what Fionnuala Earley, Nationwide's chief economist, calls "significant payment shock."

That leaves nearly eight out of ten homeowners with mortgages that are largely unaffected by the credit crunch, or perhaps even benefiting from the decision by some lenders to pass on recent rate cuts.

Nationwide is right to make this distinction but there was nothing in today's monthly update to suggest that house prices will do anything but continue to slide for the immediate future. There may not be a rush of forced sellers — yet — but demand has dried to a trickle, exacerbated by lenders, including Nationwide, that are tightening their lending criteria.

In February, Nationwide said that it would no longer offer mortgage deals on variable rates to borrowers without a deposit of at least 25 per cent. For first-time buyers in London that would mean stumping up £75,000 for an average home in the capital.

In that month also, Nationwide revised its November forecast of flat house prices for 2008, to one of "modest falls". In that forecast, the worst-case scenario was for a 5 per cent fall — which at the time seemed unlikely.

With the outlook for employment worsening and banks looking to keep a lid on mortgage lending, Nationwide may be forced soon to take a gloomier line.

As for the majority of homeowners that Nationwide says are insulated from the credit crunch, they will be hoping that banks and building societies don't do what they did in the 1990s and wait a full eight years before passing on base rate cuts.

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