The slump in Britain’s housing market gathered pace this month, with house prices suffering their biggest drop for at least 17 years, a key survey showed today.

The price of an average house fell 2.5 per cent in the month, making the seventh consecutive monthly fall in prices, the longest downward slide since the end of the early Nineties housing crash, according to the figures from the Nationwide Building Society.

The latest plunge in property values left them down 4.4 per cent from a year ago, in the steepest annual fall since December 1992, at the end of the last recession, when prices were down by 6.3 per cent year-on-year.

Some £8,000 has now been wiped off the value of an average house since in 12 months, taking this down to £173,583 on the Nationwide’s figures.

Fionnuala Earley, the Nationwide's chief economist said that it should be borne in mind that rising house prices up until last year means that even now prices are still 5 per cent higher than two years ago and 10 per cent higher than three years ago.

She added that she hoped the Bank of England would now resolve to cut rates: "Problems in credit markets have clearly been the trigger for changing fortunes in the housing market and while it is never wise to place too much weight on one data point, the apparent speed of the adjustment may lead the Bank of England's MPC to look more closely at the balance of risks to inflation in the medium term.

"Stronger than expected inflation appears to have shattered hopes of an early cut in the Bank Rate in June, but more downbeat economic and housing market data could lead more MPC members to join David Blanchflower in voting for pre-emptive cuts."

She said there was now mounting evidence of a downturn in the housing market. "The Bank of England reported an 11 per cent monthly drop in house purchase approvals in March to reach a seasonally adjusted 64,000 - the lowest since records began in 1993. RICS estate agents reported the most widespread regional falls in house prices in the history of their series.

House price expectations also fell into negative territory, as the Nationwide Consumer Confidence Index for April reported that consumers expect prices to fall by 1.7 per cent over the next six months.

Nationwide’s figures deal a blow to tentative hopes of a recovery after the British Bankers’ Association earlier this week reported a small rise in the number of loans for house purchases, to 38,704, in April, although this remains 39 per cent below a year earlier.

Meanwhile official inflation has hit 3 per cent after spiralling oil and food prices, and isexpected to soar further still later this year - reducing the chances of help through sustained interest rates cuts because the Bank of England has a 2 per cent inflation target.

Despite the steep falls in prices, Ms Earley said homeowners were unlikely to feel the pinch as badly as they did in the early 1990s when hundreds of thousands of householders who had bought at the peak of the boom in the late 1980s ended up in negative equity - their homes worth less than the amount they had borrowed.

She said fewer homeowners bought at the top of the market - which came in the second half of last year - and most have put down a larger deposit than their 1980s counterparts.

Many borrowers had also learnt from the experience of the early 90s by opting to repay capital on their loans rather than just interest. In 1988 85 per cent of loans were on an interest-only basis. In 2007-2007 only 30 per cent took out interest-only loans.

David Stubbs, senior economist at the Royal Institution of Chartered Surveyors, said: "The difficulties in the mortgage market are stretching accessibility and threaten to reduce transaction levels by 40% this year. With buyers unable to secure financing on reasonable terms, some sellers are now choosing to cut prices. The market will only stabilise once transaction volumes recover."

Mr Stubbs called on the Government and the Bank of England to implement measures to restore the smooth functioning of the mortgage market, before the drop in transactions and prices begins to really hurt the economy.

There was further negative comment from Howard Archer of Global Insight, the economic consultancy, who described the 2.5 per cent May plunge in house prices as "a real shock ". He said it would fuel concern that we were now headed for a sharp correction in house prices.

"It now looks more likely than not that house prices will suffer double-digit falls both this year and in 2009," Mr Archer said.

"On top of this, unemployment is now starting to rise, which along with many homeowners having to re-mortgage at higher rates, is increasing the likelihood that a significant people will have to sell their house for 'distressed' reasons.

"Those people who took out 100 per cent or even 100 per cent plus mortgages within the last 18 months or so at the tail end of the housing market boom are particularly vulnerable."

He said people could not rely on the Bank of England cutting rates for help. "Even August may well prove too early for another interest rate cut to occur, as the Bank of England is unlikely to act until it has sustained, clear evidence that wage moderation is continuing and that reduced demand is undermining companies' pricing power," he said.

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