The value of UK homes fell £5,000 on average in May, with prices dropping almost £12,500 since October, when the downturn began. And, although the building society’s figures show that house prices are five per cent higher than last year and 10 per cent higher than three years ago, many mortgage customers are concerned about the increasing pace of house price drops.

Chief economist at Nationwide, Fionnuala Earley, said: “Prices will continue to fall this year and the lack of mortgages contributes to the negative sentiment.”

Many experts are predicting that the decline will continue over the next year or two, with some forecasting a 20 per cent drop. Homeowners that bought their properties in recent years when property prices were high could now find themselves in negative equity; unable to sell their homes without losing thousands of pounds.

According to Morgan Stanley, two million homeowners – a sixth of borrowers in the UK – could experience negative equity if house prices fall by a fifth. And, even if prices fall by just over five per cent, approximately 370,000 homes could be at risk. Those that bought their home late last year with a high loan-to-value (LTV) mortgage could be among the worst affected.

According to the latest figures from Land Registry, house price growth has fallen for the eighth consecutive month. Annual house price growth in England and Wales fell from 3.6 per cent in March to 2.7 per cent in April, taking the average price to £183,626.

And, although those looking to buy their first home are likely to welcome house price cuts, they may find buyers less willing to sell if the number experiencing negative equity continues to rise. Moreover, mortgage applicants will have to find bigger deposits as many lenders have withdrawn high LTV deals and have increased prices for prospective buyers without significant deposits.

Furthermore, Abbey increased its rates on fixed-rate mortgage deals by between 0.15 per cent and 0.56 per cent yesterday, while, Woolwich upped several two-year fixes sold through intermediaries by 0.1 per cent, and certain 10-year fixed rates by up to 0.3 per cent.

© Fair Investment Company Ltd