House price inflation fell to a 19-month low of 4.8 per cent in December according to the latest figures from Nationwide building society. In June prices were rising at an annual rate of 11.1 per cent.

Nationwide warned today that the market had fallen so sharply that further interest rate cuts would do more to stabilise the market than lift it.

Fionnuala Earley, chief economist at Nationwide, said: "It is true that lower interest rates will probably help market activity recover somewhat later in 2008, as lower house price growth restores some affordability and allows pent-up demand from first-time buyers to be released...but these will do more to stabilise the market than re-ignite it."

The average price of a home dropped 0.5 per cent to £182,080 in December, following a 0.8 per cent decline last month. This took the annual rate of house price inflation to 4.8 per cent, compared with 6.9 per cent in November and 11.1 per cent in June.

House price inflation has not been under 5 per cent since the spring of 2006.

The continuing unrest in the credit markets following the fallout from the sub-prime crisis in the US and the damage to confidence after the collapse of Northern Rock have all exerted pressures on the property market.

Ms Earley said: "The turmoil in the financial markets resulting from the US sub-prime mortgage issue and the problems experienced by a UK mortgage bank have swiftly added to the pace of changing sentiment in latter months."

Howard Archer, chief economist at Global Insight, said the real concern for the property market lay in the stability of the wider economy. He said he is now expecting house prices to fall 3 per cent next year. He had thought they would remain flat.

Mr Arhcer said: "There is undeniably a very real - and growing danger - that the housing market could see a sharp correction next year. Probably the biggest risk is that the economy slows sharply over the coming months and unemployment starts rising significantly."

His warning comes as The Chartered Institute of Personnel and Development said unemployment next year will rise to its highest level since 1997 as the credit crisis takes its toll on the real economy.

The Institute forecast unemployment will rise by 150,000 next year to 1.8 million, its highest since Labour came to power. The number of people in work will edge up just 0.25 per cent or 75,000 in the year to December 2008, a third of the figure for the last two years.

Meanwhile KPMG, the accounting firm, predicts that a record total of more than 130,000 people are likely to declare themselves bankrupt or enter individual voluntary arrangements in 2008. This compares with 111,000 becoming insolvent in the 12 months to September this year.

Figures from the British Bankers Association (BBA) yesterday showed that the number of mortgages approved by lenders in November fell 43 per cent compared with the same month a year ago.

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