House prices have recorded the first annual decline since 1996 as a leading investment bank gave warning that the economy would be the worst hit by the global credit crisis.

The value of an average home fell by 1.8 per cent in April, the sixth successive monthly fall, figures from Nationwide, the second-biggest mortgage lender, show. The average cost of a home is now £178,555, 1.1 per cent lower than in April last year when the average price was £180,314, equivalent to a loss of about £5 a day.

This gloomy news for homeowners came as Jim O’Neill, chief economist at Goldman Sachs, who correctly forecast the collapse of the US property market, said that Britain was likely to be the worst hit of the world’s economies in the fallout of the global credit crisis.

Mr O’Neill said that Britain, with its heavy reliance on financial services, was “in the eye of the storm of a delev-eraging world economy” and that British homeowners would bear the brunt of the City’s ensuing slowdown.

Oil is the key to world recovery

The shock of $140 oil has created inflationary and deflationary pressures that threaten world economy and policy tools

• Former President Bush energy adviser says oil is running out

BACKGROUND

• Oil is the key to world recovery

• Banks may need to pump billions into scheme

• UK economic growth weakest for three years

Related Internet Links

• Full credit crunch coverage

BACKGROUND

• Happy days are over for UK households

• Banks restrict mortgages by brokers

• Credit crunch halves lending at Nationwide

• JPMorgan to cut Bear Stearns jobs

• George Soros: Crunch will bite deeper in UK

Related Links

• House prices 'may fall quarter by 2010'

• Are house prices really set to plunge?

• House prices: disaster ahead

“The UK mortgage market is effectively frozen . . . House prices are going to go through negative changes . . . It’s going to be a challenge for UK policymakers,” he said.

The credit crunch has already started to affect the housing market as prospective buyers have been deterred by demands from lenders for hefty deposits. Seven of the ten leading lenders will not lend to borrowers who have less than a 10 per cent deposit.

Fionnuala Earley, chief economist at Nationwide, said: “The fall in transactions has pushed up the stock of unsold property on the market and improved the bargaining power of buyers, thus pushing down on prices.”

David Blanchflower, a member of the Bank of England’s Monetary Policy Committee (MPC), said earlier this week that a 30 per cent fall in house prices by 2010 was not implausible. The MPC, which holds its monthly rate-setting meeting next week, will not only have to consider the gloomy news on housing, but will also have to take into account the sharp dip in morale. Consumer confidence fell to -24 in April, down from -19 in March, figures from the GfK NOP show. This is the lowest level of consumer confidence since November 1992.

Howard Archer, of Global Insight, the economic consultancy, said: “Pressure is mounting on the Bank of England to quickly cut interest rates again despite current elevated inflation levels and risks.”

The Bank of England said yesterday that the worst of the credit crunch may be over and that credit conditions should gradually start to improve. However, lenders were offering little comfort for homeowners and buyers.

Ms Earley said that the Bank of England’s £50 billion special liquidity scheme was unlikely to signal a return to mortgage deals that were available last year. This was echoed by Michael Coogan, director-general of the Council of Mortgage Lenders. Speaking at a meeting of MPS and debt groups, Mr Coogan said: “What we will not have is a return to some of the products which have been in the market in recent years, and some of the low mortgage pricing which we have seen due to the effects of competition in the UK market in past years.”

Hundreds of thousands of borrowers who have come to the end of short-term mortgage deals have already had to shoulder sharp increases in mortgage payments this year. Lenders, finding it difficult to access funding because of the seizure in the money markets, are raising their rates in an effort to limit home-loan applications. Halifax, the biggest mortgage lender, increased last week the rates on some of its mortgage deals for the fourth time in four weeks. Mr O’Neill, who has a reputation or making farsighted predictions, added that the declining fortunes of the country’s services sector are likely to see Britain lose ground to the rest of the Europe.

He sees the economy slowing to an annual rate of growth of 1.8 per cent this year and in 2009, down from 3 per cent in 2007. That puts him among a chorus of respected economists and institutions who challenge the upbeat forecast of Alistair Darling, the Chancellor, that the economy will rebound sharply next year after a lacklustre 2008. By contrast, Mr O’Neill struck an upbeat tone on the fortunes of the wider global economy, which he argued remains fundamentally sound and is likely to grow at a rate above its historical trend this year.