House prices across much of Western Europe have stalled or begun to fall as spiralling borrowing costs and fears of over-supply take their toll on markets from Ireland to Spain, an industry survey has revealed.

The German housing market has been hit hardest. A glut of property for sale in former East Germany dragged down price inflation countrywide, leaving the national average down 6.9 per cent over the 12 months to the end of June.

Prices on average in the United States rose 3.2 per cent as a rebound in markets such as Texas and Oklahoma offset continuing falls in Florida and a stagnant New England market over the same period, Knight Frank’s global house price index reveals.

House prices in the US began to fall last autumn after five years of soaring inflation. However, they have slumped by as much as 20 per cent in the South since the spring after a collapse in the sub-prime market — lending to those with poor credit histories — triggered a wave of forced sellers into a market already awash with too many speculative developments. The decline is likely to become steeper as the impact of the sub-prime debacle unfolds.

Liam Bailey, Knight Frank’s head of residential research, said that he expected “price falls in about half of the states” for the coming year. Despite the latest half-point cut in US interest rates, the American housing market still has to digest months of oversupply from speculative developers, he said.

Irish homes enjoyed inflation on average of only 0.9 per cent over the same period, but that was distorted by a gain in Dublin, offsetting a 0.4 per cent fall across the rest of the Republic. Prices across Ireland for the whole of the first half of this year have fallen by 3.5 per cent, bringing to an end a near decade-long boom in the Republic’s housing market.

Ireland’s residential market boom has spawned a new generation of Irish property investors, who bought first into London’s multibillion-pound office market, then into Britain’s retail commercial property market and who for the past three years have been investing in Central Europe. Irish buyers, like other European house-hunters, have been hit by rising interest rates. Central bank rates in Europe rose from 2.75 per cent in June 2006 to 4 per cent by June of this year.

Mr Bailey said: “Ireland mirrored the UK housing market, but when the UK slowed down two years ago, investors expected Ireland to follow suit. It didn’t, as house prices continued to rise between 10 per cent and 12 per cent annually. There is a slowdown to negligible growth now as Ireland has reached its limits on affordability.”

British house price inflation nearly halved to 5.6 per cent between the first and second quarters of this year, according to the report. The Royal Institution of Chartered Surveyors cut its forecast yesterday for 2008 from 3 per cent growth to zero. However, Knight Frank has cut back its UK forecast only from 6 per cent to 4 per cent growth for 2008, with Mr Bailey insisting that national under-supply and demand for upmarket homes around London would mean that prices would track earnings inflation.

Globally, house prices rose 7.8 per cent for the year to the end of June this year, a slowdown from annual growth of between 9 per cent and 9.7 per cent over the previous three quarters. Likely big house price risers next year are smart coastal Brazilian homes and affordable homes in India and China for the region’s burgeoning middle classes.

“There are increasing numbers of more upwardly wealthy in China, Brazil and India, and that spills into property. We see boring growth in UK, France, Ireland, Spain, the US and Western Europe over the next one to two years,” Mr Bailey said.

Latvia stood out once again, with prices in Riga, the capital, rising 37.7 per cent over the year to the end of June, albeit it off a very low base.

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