Annual house price growth fell to its lowest level for 12 years during March as prices dropped for the fifth month in a row, figures showed today.
The average value of a home inched ahead by just 1.1% in the year to the end of March, its lowest rate since March 1996, according to Nationwide Building Society.
Prices have fallen by 0.6% during the past month to leave the average property costing £179,110, 2.9% less than when prices began their downward trend in November and just £2,027 more than in March last year.
The group warned that there had been a "clear change in sentiment" since the summer, and this was contributing to the "sharp slowing" in house price growth.
Fionnuala Earley, Nationwide's chief economist, said: "The outlook for UK house prices is clearly more downbeat than at the time of our November forecast.
"Some of the downside risks we identified then have become a reality - most notably the continued turmoil in the financial markets."
The group now expects house prices to end the year up to 4% lower than they started it, although it added that a "modest fall" would ensure greater stability in the market going forward.
House prices are coming under pressure from a combination of stretched affordability and the credit crunch, which has led to lenders tightening their lending criteria and raising their rates.
The trend is hitting first-time buyers particularly hard, as they are being forced to raise larger deposits, with very few 100% mortgages still remaining.
The British Bankers' Association yesterday said the number of mortgages approved during February for people buying a house had fallen by a third compared with the same month of 2007 as people put off moving or struggle to raise the mortgages they need.
Nationwide, which is the UK's second biggest mortgage lender, today raised its mortgage rates by 0.2% for fixed rate deals and by between 0.5% and 0.57% for tracker ones.
It blamed the move on "significant increases" in the cost of funding, adding that it had seen "huge inflows of business" as its competitors had raised their rates.
Norwich & Peterborough Building Society, which has regularly featured in the mortgage best buy tables, also raised its fixed rates by between 0.20% to 0.25% and its variable ones by up to 0.5%.
The constant increases being made by lenders to their mortgage rates has wiped out the two interest rate cuts made by the Bank of England in December and February, increasing the pressure on the Monetary Policy Committee to reduce rates again.
Economists are now expecting the MPC to cut rates in April or May, despite concerns about higher inflation, after Bank Governor Mervyn King said the MPC would reduce rates again.
Howard Archer, chief UK and European economist at Global Insight, said: "The Nationwide data indicate that house prices are continuing to buckle under the substantial pressure emanating from increased affordability constraints and markedly tighter lending conditions.
"Global Insight currently expects house prices to fall by 5% in both 2008 and 2009. Nevertheless, the current escalation of the credit crunch means that there is an increased risk that a significantly sharper housing market correction could occur."
He said this could be triggered if both buyers and sellers started to expect prices to fall sharply, prompting sellers to put their homes on the market in a bid to cash in on previous gains, while buyers delayed making a purchase.
Simon Rubinsohn, chief economist at the Royal Institution of Chartered Surveyors, said there had been a shift in sentiment towards the property market. He said: "Lenders are continuing to respond to the worsening conditions in the money markets by raising the cost of mortgage loans and tightening up on lending criteria.
"This is making it even harder for first time buyers to take their first step on to the property market. There is little reason to believe that underlying problems facing mortgage lenders will ease anytime soon. As a result house prices are likely to continue to drift lower in the coming months."