There was dire news for homeowners last week as a leading investment bank and former government adviser forecast a 15% fall in house prices in the next two years.

Morgan Stanley chief economist David Miles, who is also an adviser to the Treasury on the mortgage market, predicted the property price slump would push 1.2m people – or one in ten homeowners with loans totalling £164 billion – into negative equity as mortgage approvals slow drastically in coming months.

The forecast came just days after Communities and Local Government figures showed the value of an average property fell to £217,737 in February – the lowest level since last June.

Prices have dropped most sharply for flats, down 2.9% in a month, followed by semidetached and detached homes, which fell 1.5%, and terraced houses, at 1.1% lower. The price of bungalows dropped just 0.6%.

Halifax, Britain’s biggest mortgage lender, reported this month that its house price index fell 2.5% in March, with some regions seeing declines of 5% in a month.

Rightmove, the property website, reported on Friday that agents were being forced to offer homes in exclusive London areas such as Kensington and Chelsea at discounts of 2% in the last month.

The Royal Institution of Chartered Surveyors said 78.5% more surveyors reported falling house prices last month.

However, Rics said price falls were being contained by the small number of properties coming on to the market.

Last week, the Council of Mortgage Lenders said lending had increased in March, but predicted the slowdown would accelerate later in the year.

Chairman Steven Crawshaw, who is also chief executive of Bradford & Bingley, the UK’s biggest lender to landlords, said this month mortgage lending could halve in 2008 without drastic measures from the Bank of England.

It emerged last week that the Bank is considering a proposal to encourage banks to lend more freely again by offering to take on existing mortgages in return for government bonds.

However, the plan has come under fire from MPs, with Liberal Democrat treasury spokesman Vince Cable branding the proposal as “nationalising debt”.

Morgan Stanley said in its report that if house prices fell by 25% over the next two years, more than 2m – or a quarter of all borrowers – would be in negative equity.

Negative equity “danger zones” are reported to include parts of Glasgow, southeast London and Manchester, according to credit reference agency Experian.

The CML predicts that home repossessions will rise by 50% to 45,000 this year.

Explore Money

• Property & Mortgages

• Savings

• Borrowing

• Investment

• Funds

• Insurance

• Consumer Affairs

• Tax

• Pensions

• Broadband