The housing slump appears to be getting rapidly worse as ministers prepare to give councils extra money to intervene in the market.

House prices fell at the fastest rate in 18 years this month and a leading estate agent said that multimillion-pound homeowners were feeling the pain of the downturn for the first time.

The value of an average home fell by £5,000 this month to £164,654, according to figures from the Nationwide building society - nearly £22,000 less than in October last year. Prices have fallen by more than 10 per cent since last August, the largest drop since the worst point of the housing market crash in 1990.

The deepening malaise in the market has also wiped tens of thousands off the value of country piles and luxury London homes, according to a leading estate agent.

Multimillion-pound properties were relatively unaffected by the housing downturn that followed the credit crunch as well-heeled buyers were unaffected by the clampdown in mortgage lending. But prices for properties worth between £1million and £4 million have fallen sharply in recent months, according to Savills.

Country homes worth between £1 million and £2 million fell in value by 5.2 per cent, or £72,000, in the three months to June. Houses worth between £2 million and £4 million slipped by 3.2 per cent, wiping nearly £100,000 off the price of a £3 million home. Prices of London homes worth between £1 million and £2 million dropped by more than 8 per cent. Savills said that only prices of properties worth £4 million or more were holding up in the downturn.

More worringly for ministers, the Council of Mortgage Lenders predicts that 45,000 people will be repossessed in Britain by the end of the year, an increase of 50 per cent from last year, as rising food and fuel prices and a slowing economy leave families unable to pay their mortgages.

In an attempt to stem the tide, Alistair Darling, the Chancellor, and Caroline Flint, the Housing Minister, are planning to announce an emergency “mortgage rescue” package next week.

Under the plans councils will be encouraged to offer low-income families at risk of repossession the chance to sell a stake of their houses in return for financial help. First-time buyers will also be given more council-backed assistance with deposits and town halls will be given extra money to buy up empty, unsold new property.

A more radical proposal under which councils would have been freed to compete as mortgage lenders with access to a pot of £2 billion in government borrowing has been vetoed by Mr Darling. Instead he is likely to extend a Bank of England guarantee designed to boost confidence among existing lenders.

It is understood that other options to kick-start the housing market, including a stamp duty holiday, are being held back for further consideration.

Measures to increase significantly the ability of councils to buy property have won support in many Labour-led councils. They reverse a trend begun almost 30 years ago by Margaret Thatcher, whose policies were designed to reduce the amount of council-owned or council-controlled housing stock.

Analysts said that prices would continue to fall in the coming months.

First-time buyers, struggling to get mortgages as lenders demand hefty deposits, show little sign of returning to the market, forcing sellers to cut their prices even more. Alliance & Leicester said this week it would not lend to borrowers who had less than a 15 per cent deposit. Many potential buyers are also waiting until they feel prices have hit rock bottom.

Recent figures showed that mortgage approvals for house purchases by big banks fell by two thirds in July compared with a year earlier. Seema Shah, of Capital Economics, said: “The slump in mortgage approvals is consistent with further sharp falls in house prices in the months ahead.”

Jonathan Hewlett, director of Savills in London, said: “Reality has hit home in the prime market, with sellers happier to adjust their prices in order to clinch a sale.”

The steep decline in prices has already pushed thousands of homeowners into negative equity, and further falls could leave more than a million people owing more on their property than it is worth. Vince Cable, of the Liberal Democrats, said: “House prices are no longer simply falling, they are crashing. All the signs are that we are at the beginning, and not the end, of a very painful process.”

Some analysts forecast that prices could fall by as much as 35 per cent from their peak last year and may not start to rise again until 2010.

The grim conditions in the housing market are taking a heavy toll on estate agents. Fears are growing that as many as 10,000 estate agents could lose their jobs by the end of the year.

The bleak prediction, after an estimated 4,000 redundancies in the industry so far this year, would mean that about 15 per cent of the industry's workforce will have been handed their cards since the end of the house price boom.

Last week, Halifax Estate Agents, owned by the banking group HBOS, said that it would shut 53 branches and cut 100 jobs because of housing market difficulties. Savills also said yesterday that it would cut jobs. Ben Yearsley, an investment manager at Hargreaves Lansdown, the stockbroker and asset manager, said: “If the housing slump continues much longer than this, we are likely to see 10,000-plus jobs going.”

Money Central: London house price data, borough by borough

Cut-price piles

Shrubland Hall, Ipswich, Suffolk
Described as the most important sale in East Anglia for a generation, lots 1 and 2 (the main house, built in 1770, the gardens and gatehouse) have been on the market since April 2006, although smaller parts of the estate have been sold separately. The guide price is down from £8 million to £6.5 million

Machan, Cornwall
On the market since September; guide price down from £4.5 million to £3.5 million. Stephen Perks, of Hampton International, said: “Potential buyers may under more normal circumstances have sold up and purchased Machan as a fabulous hillside retreat. These potential buyers are holding on to see what will happen to the property market.”