May house prices post record fall

House prices fell a record 2.5 percent in May, the Nationwide Building Society said on Thursday, raising fears the property market downturn could soon turn into a crash that would impact the whole economy.

The monthly drop, the largest since the lender started compiling records in 1991 wiped 5,000 pounds off the value of the average home and took prices 4.4 percent lower than a year ago - the biggest fall since the economic slump of 1992.

"The marked deterioration in sentiment over the housing market also heightens the risk that house prices will fall sharply over the next couple of years," said Howard Archer, economist at Global Insight,

Prices have now fallen seven months running - also the longest stretch of falls since 1992 -- and one Bank of England policymaker has warned they could come down by a third.

That could prove toxic for Prime Minister Gordon Brown, who is banking on a economic recovery to boost his sagging fortunes.

"The news just keeps getting worse," said Alan Clarke, economist at BNP Paribas.

The pound fell slightly against the dollar after the report, which added to the general gloom about the British economy as it slows because of the effects of a global credit crunch.

Nationwide said it still expected house prices to fall by less than 10 percent this year but said things were getting worse, with the pace of decline more than doubling from the previous month.

"The pace of house price falls accelerated in May as more weak economic news added to the gathering momentum of negative sentiment in the housing market," said Fionnuala Earley, chief economist at the Nationwide, Britain's second largest mortgage lender.

Nationwide noted that house prices were still 10 percent higher than three years ago and most homeowners were still sitting on comfortable equity cushions. However it suggested the Bank may need to cut interest rates "sooner than markets currently expect".