House prices fell by 2.4 per cent in May, wiping £4,000 off the price of an average home in what analysts called an alarming development.

The price of an average home is now £184,111, down from £188,704 in April, according to Halifax, the UK's biggest mortgage lender.

In the three months to May, the average house price is 3.8 per cent lower than the same period last year, Halifax said.

Activity in the housing market is being severely squeezed by a lack of funding in the mortgage market. Lenders, finding it difficult to access funding after investors took fright after the US sub-prime crisis, are cherry-picking their customers, charging higher interest rate and demanding heftier deposits.

A first-time buyer who does not have a deposit of at least 5 per cent will now struggle to get a home loan. Last year, they could choose between a number of 100 per cent and even 125-per-cent deals.

This gloomy news for homeowners came as the Bank of England today spurned pleas for a new cut in interest rates to shore up the faltering economy and slumping housing market and held them at 5 per cent.

The harsh noon verdict from the Bank’s rate-setting Monetary Policy Committee (MPC) dealt a fresh blow to hard-pressed households and businesses, fearful of rapidly worsening economic prospects and struggling with mounting financial strains.

Figures from rival lender Nationwide last week showed house prices fell 2.5 per cent in May, the sharpest monthly fall since its survey began in 1991.

The average price of a home is now £184,111, according to Halifax.

Martin Ellis, chief economist at Halifax, said: “The decline in prices is caused by the difficulties created for potential house purchasers by the rapid rise in house prices in the last few years, a squeeze on spending power and the reduction in credit availability. These factors have curbed housing demand.”

However, Halifax stressed that the price falls needed to be seen in the context of the strong house-price gains experienced in recent years, with the cost of a home soaring by 79% during the five years to August 2007 - an average rise of £88,000.

Halifax added that it continued to expect high employment levels, low interest rates and a shortage of new homes being built to support housing valuations.

Howard Archer, chief UK and European economist at Global Insight, said: "The latest data on the housing market are undeniably alarming. Clearly, the downward pressure on house prices coming from stretched buyer affordability and tight lending conditions is now biting hard."

Global Insight has revised down its forecast for house prices and expects them to fall by 12% in 2008 and 2009.

"The marked deterioration in sentiment over the housing market also heightens the risk that house prices will fall sharply over the next couple of years. 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," Mr Archer said.

People who took out 100 per cent or even 100 per cent-plus mortgages within the last two years are particularly vulnerable, he added.

Separately, Bellway, the housebuilder, said it would sell fewer homes in 2007 to 2008 than previously forecast, after reservations this spring fell nearly a third as buyers struggled to find mortgages.

“There has been no sign of the normal spring selling surge... the restricted mortgage supply, combined with a sapping of consumer confidence, is leading to further market weakness,” Bellway said.

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