The first monthly fall in house prices this year was reported yesterday, fuelling fears that a looming downturn in the property market will hit the economy hard next year.

In the latest sign that the housing market is now rapidly losing steam, Halifax, Britain’s biggest mortgage lender, said its regular survey showed that average national house prices fell by 0.6 per cent in September, marking their first monthly fall since December.

The gloomy news for homeowners squeezed by higher interest rates comes as Alistair Darling, the Chancellor, today concedes for the first time that the economy’s prospects will be dealt a blow by the global credit squeeze, forcing him to downgrade his forecasts for growth next year.

In a Financial Times interview today, the Chancellor insists that the UK economy remains in a “very strong position”.

But he admits that the impact of the squeeze in lending markets that triggered the Northern Rock debacle last month would “undoubtedly” have a wider effect on Britain’s growth next year.

“It would be prudent to assume it will have some effect on us here,” Mr Darling says.

His comments suggested that in his Pre-Budget Report, which is now expected as soon as Monday, he will be forced to markedly scale back the Treasury’s present forecast for economic growth of between 2.5 to 3 per cent next year, to perhaps as little as 2 per cent.

Mr Darling’s admission emphasises his limited room for manoeuvre at the Treasury since weaker growth will inevitably push the Government’s finances deeper into the red at a time when it is already borrowing heavily.

The Treasury’s strained financial position means that next week the Chancellor is already set to unveil Labour’s toughest budget plans this decade, with growth in spending on key public services set to slow sharply in the coming three years.

Yesterday’s latest confirmation that the housing market, which has been a key engine for the economy in recent years, is now faltering, will add to the Treasury’s worries over the outlook and further raise the high stakes over Gordon Brown’s decision over whether to call an immediate election.

The Halifax figures yesterday did show that, for now, annual house price inflation remains in double digits at 10.7 per cent, thanks to past, steep gains in property values.

But a growing number of City economists expect the annual rate of increase in prices to tumble into low single figures by next year as the market’s boom fizzles out.

A Reuters poll of economists yesterday showed an average prediction for house prices to rise by just 2.2 per cent over next year as a whole. The poll pointed to a one-in-three chance of a year-long drop in house prices in 2008.

The City also doubts how quickly the Bank of England may ride to the rescue of either homeowners or the Chancellor with cuts in interest rates. Yesterday, the Bank held base rates, as expected, at 5.75 per cent.

While a minority of economists believe the Bank will cut borrowing costs next year, most still think its nagging worries over inflation will see it stay its hand into 2008.

The housing market is slowing under pressure from the five interest rate increases pushed through by the Bank since August last year, and as homebuyers coming to the end of cheap, fixed-rate deals face more expensive repayments.

In his interview today, Mr Darling says that there are “quite clearly lessons to be learnt at several levels” from the Northern Rock affair.

He says that he is “prepared to look at the boundaries” between the three key institutions that had to cope with the crisis — the Treasury, Bank and the Financial Services Authority.

He also dismisses claims by the Bank of England that it could have avoided the run on Northern Rock if it had been allowed to pursue a secret rescue.

In a fresh hint that he might steal the clothes of the Conservatives, after they proposed this week targeting rich foreign residents living largely tax-free in the UK — the so-called “non-doms” — Mr Darling adds: “This is something which needs to be looked at.”

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