Graphic: the slump goes on | Mortgage calculator: is it better to rent or buy?

The fall in property prices has wiped out five years’ worth of gains, with the £147,746 average now close to what it was in April 2004.

Prices dropped a further 1.8 per cent this month, according to a survey that was released yesterday by the Nationwide Building Society, bringing the annual decline to a record 17.6 per cent.

The figures highlight the impact of the drought in funds for new mortgages, with potential borrowers who are unable to provide deposits of at least 20 per cent being excluded.

Fionnuala Earley, the Nationwide’s chief economist, said that the need for a large deposit was a constraint on the ambitions of buyers, particularly those who were aspiring to buy for the first time.

The shortage of lending meant that housing bargains produced by the downturn were being seized on mainly by cash buyers.

Cash sales, which are not recorded in the statistics produced by Nationwide or by Halifax, the largest lender, now account for 40 per cent of transactions as some older, richer buyers turn to property as a more lucrative alternative to low-paying deposit accounts.

The strength of cash purchases does not, however, herald an imminent recovery. Forecasts by Savills, the estate agent, suggest that prices could take a decade to recover in Northern Ireland, although the gloom could lift earlier in London and South East, where property values may be restored to their 2007 levels in 2012.

The report by Nationwide suggests a continuing lack of confidence among those who want to take out a mortgage despite successive cuts in interest rates. The Monetary Policy Committee of the Bank of England is expected to reduce the base rate again next week and the Bank is likely to increase the amount of money in the British economy by “quantitative easing”. It is predicted that both moves will improve the supply of funds for mortgages.

Northern Rock, the state-owned bank, announced this week that it would resume new mortgage lending, advancing £14 billion over the next two years. However, borrowers with deposits of less than 10 per cent are unlikely to be eligible.

Ms Earley said that it was too early to say that the market had reached its lowest point, but she added: “Falling prices and interest rates are raising curiosity, which could flow through quickly once confidence returns.” She said that auction rooms were increasingly popular with people seeking bargains.

Lower interest rates had already helped those with a mortgage, Ms Earley pointed out. The 4.5 percentage point fall in the base rate since 2007 meant that a typical borrower in Greater London owing £153,526 with a base-rate tracker loan was paying £380 less a month.

Such savings offer some compensation for the threat of negative equity that hangs over the millions of people who bought when prices were at their highest.

The downward trend in prices could drive about 1.2 million more homebuyers into negative equity, in which debts are greater than the value of their homes.

By the end this year, about five million homebuyers could be in that position, according to a forecast which is being released today by GfK Nop, the financial researcher.

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