The queues outside Northern Rock may have gone, yet slowly but surely the air seems to be coming out of the British property market.

Economists at mortgage lenders and the research departments of leading estate agents were last week scaling back their forecasts of house-price growth after figures from the Royal Institution of Chartered Surveyors (Rics) showed that prices dropped in August for the first time in two years, while the number of new buyers fell to its lowest level in three years.

A combination of turbulence on the financial markets, five interest-rate rises between August 2006 and July this year – from 4.5% to 5.75% - and the laws of gravity, it seems, are taking their toll. The only fillip for the market was provided by the decision, on Tuesday, by the Federal Reserve, the American central bank, to reduce increase rates by half a percentage point to 4.75% – the first cut in four years, and the biggest since 2002 - fuelling speculation that the Bank of England would soon follow suit, restoring much-needed confidence to the wobbling British market.

“We are witnessing a ‘rabbit in the headlights’ reaction,” says Max Ziff, chief executive of the estate agency Humberts. “It will be a month or two before we can accurately measure the impact of this week’s developments on the property market.

“We will see an early correction in prices, but not a crash. While prices will inevitably fall, the impact will be heavily skewed towards the lower end of the market and the big conurbations, where properties tend to be purchased with higher proportions of debt.”

Disentangling seasonal effects from underlying housing-market trends is not easy, but, nationwide, the market has been cooling all year, with prices down in some areas. Even London, the motor of recent growth, is not as hot as it was.

In its latest monthly survey, the property website Rightmove reported that average asking prices in the UK fell by 2.6% in the month to mid-September; in the capital, prices dropped by 2.5%, prompting fears of a rerun of the slump of the early 1990s.

Rics believes the shockwaves following the “credit crunch” problems that began in the American sub-prime markets, coupled with consecutive monthly falls in buyer inquiries, are enough to dent even the top end of the London housing market, and says there is a “one in five” chance that prices in the capital will fall by 10% over the next 12 months. It has also scaled back its forecast for 2008: rather than rising by 3% next year, it predicts, prices will stay constant.

“Our view is that by the end of next year, you will see flat year-on-year growth,” says Simon Rubinsohn, chief economist at Rics. “That is not a fall in prices, just a gradual ease-off.”

Hari Sothinathan, a senior analyst in the residential research department at the estate agent Knight Frank, predicts 5% growth for the remainder of the year. He believes, though, that even the most optimistic economists will start to revise down their forecasts for 2008. “All the indicators suggest a slowing market,” he says.

Last week, Vincent Cable, deputy leader and Treasury spokesman for the Liberal Democrats, added to the gloom.

“From Dutch tulips to dotcom shares to Japanese land prices, and now UK house prices, we see banks and individuals entrusting their money to a market that seems to offer a one-way bet,” he told his party’s conference. Cable was keen to call an end to the “frenzied signs of collective madness” that have led to years of spiralling house-price growth and stretched affordability.

In America, meanwhile, Alan Greenspan, the former chairman of the Federal Reserve, also predicted that Britain’s housing boom would soon be over. “It’s going to turn, it’s got to turn,” he said.

Douglas McWilliams, founder and chief executive of the Centre for Economics and Business Research (CEBR), thinks the UK market has turned already. The latest quarterly Chesterton meta-index, which he produces for the estate agency of the same name, showed overall house-price inflation of 10% - but, while the top 20% of the market grew by 14%, the bottom 20% saw growth of only 7%. He expects the next index to provide further evidence of a slowdown.

“It is clear that mortgage lenders such as Alliance & Leicester, Bradford & Bingley and HBOS will want to scale their loan books back, and house-price growth will go into reverse,” McWilliams says. “We will get negative numbers, perhaps as much as 10%. But the largest falls will be in transaction numbers, which could fall by as much as 20% to 30%, as they did during the last recession.”

McWilliams warns against overdramatisation, however. “It will only be a temporary slowdown, lasting one year, not like in the early 1990s, when it lasted five years,” he says. “In the medium term, it is all good news.”

So, are we simply talking ourselves into a recession with all this talk of crises and price crashes? Rubinsohn remembers when, three years ago, a combination of negative articles in the press, an IMF report claiming British housing was overvalued and comments by the Bank of England conspired to create a negative mood.

“It led to a sharp slowdown in the market,” he says. “It turned the mood, which then turned prices – but only temporarily.”

At the time, again, the underlying economic fundamentals of strong growth, with low unemployment and interest rates, prevailed, and the market returned to its upward path. The question is, will the same happen again?

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