House prices fell for the first time in two years this month, sending a shudder through millions of homeowners already hit by rising mortgage repayments and more expensive borrowing.

The outlook for homeowners is likely to worsen with news that the wealthy are losing confidence in bricks and mortar as an investment. There has been a big drop in City bonuses being used to buy prime property in Central London and in the popular second-homes areas, triggering fears of price falls in the South West, East Anglia and the Cotswolds.

Today’s figures will increase the anxiety of millions who have banked on ever-rising prices to fund their old age and pay off mortgages. To add to their misery came a new warning from America, that Britain would not escape the fallout from the US as the property market there went through its worst recession in 16 years. Robert Shiller, Professor of Economics at Yale University, who forecast the end of the dot.com bubble in March 2000, told The Times that the slowdown would start in London.

The amount of City bonus cash flowing into prime London property and into second and third homes will fall by 60 per cent to £2 billion in the coming year, according to one of the country’s largest property agents. This will lead to at least six months of falling prices in Central London, predicted Savills, the estate agency, which specialises in selling houses worth £1 million and more. Also at risk are the Cotswolds, the South Westand parts of Norfolk, Suffolk and Kent.

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Today’s figures come days after a report published by the International Monetary Fund saying that Britain’s housing market is overvalued by as much as 40 per cent.

House prices fell by 0.1 per cent in October, following two months of zero growth as higher interest rates and falling confidence hit the market, according to today’s report by the property website Hometrack. Analysts predict that figures to be released by Nationwide this week may show a sharp slowdown in house prices after months of falling demand, declining sales and weaker confidence in the economy and in housing as an investment.

Average prices fell in all regions last month except the West Midlands where they were static, Hometrack said. Richard Donnell, director of research at Hometrack, said: “Overall we expect the rate of house price growth to slow further over the coming months with further small price falls likely in markets where achievable pricing levels are falling into line with demand. This is likely to be focused on the markets that have seen the greatest rises over recent years.”

Savills gave a warning that the top end of the property ladder and the second-home market could be hit hardest because financiers, accountants and lawyers no longer saw property as a good buy and were more likely to put money into hedge funds.

Meanwhile, the Centre for Economics and Business Research predicted that the credit crunch, combined with five interest rate rises in just over a year, would cause prices to fall for the rest of this year and into early 2008. But it suggested that the housing market would shrug off the difficulties within a year and that by 2010 annual growth would be back at up to 7 per cent because of an imbalance of supply and demand.