(RTTNews) - UK house prices in August showed the largest annual decline in 18 years, as concerns over economic downturn as well as lower mortgage lending hurt the housing market, a report released by the Nationwide Building Society revealed Thursday.

The price of a typical UK house recorded a double digit decline of 10.5% year-on-year in August, severe than the 8.1% fall in July. The decline in August was the largest since the fourth quarter of 1990 and exceeded the 9.6% fall expected by economists.

Month-on-month, house prices were down 1.9%, following a revised decrease of 1.5% in July. Average house prices dropped to GBP164,654 from July’s GBP169,316.

Fionnuala Earley, Nationwide’s Chief Economist said, “While the pace of monthly falls picked up during the month, the less volatile three month on three month measure, eased very slightly in August to 4.5% from 4.6% in July.”

According to the Nationwide Building Society, recent housing market activities were very subdued and house builders reported a considerable fall in site visits and reservations of new properties despite higher sales incentives. House builders consider lack of confidence in the market and changes in lending criteria to be the reasons behind the decline in demand.

At the same time, estate agents experienced an improvement in new buyer enquiries, possibly initiated by the fall in prices and the opportunity to negotiate a good deal. But the reported number of sales was not encouraging. The increased supply of properties on agents’ books would continue to act as a dampener to house price growth in the short term.

More borrowers opted for fixed rate loans to protect their payments in uncertain times even though they are more expensive than trackers loans. Since October 2007, tracker loans have been cheaper than fixed rate loans. “This is unusual for UK borrowers who, as the Miles Review illustrated, attach enormous weight to the level of initial monthly repayments, rather than considering the potential movements in prices over a longer period,” the Nationwide stated.

Among the fixed rate loans available, borrowers are opting for longer-term fixed rate loans. Five and ten year fixed rate loan which accounted for only 21% of house purchases in the beginning of the year, reached 39% in June.

The Bank of England’s forecasts of growth and inflation was interpreted as opening the door to rate cuts and the building society expect the next move in the bank rate to be down. But the extent to which the rate cut could revive the mortgage and housing market would possibly limited as overall confidence in economic and housing markets conditions is low, Nationwide added.

Earlier, the UK’s largest homebuilder, Taylor Wimpey said the current operating condition in the UK housing market is very challenging. Taylor Wimpey does not anticipate any recovery in the short term, and expects conditions to possibly remain tough in the UK as well as US housing markets. However, the company expects both these markets to remain attractive in the medium and long-term due to the positive demographic trends.

On August 26, the British Bankers’ Association, or BBA, reported that the number of mortgages approved for house purchases in July totaled 22,448, down 65% on an annual basis. Meanwhile, mortgage lending increased GBP4.3 billion, the same as in June.

In the second quarter, UK economic growth came to a standstill after enjoying positive growth and low inflation for an extended period. The real Gross Domestic Product was flat on a sequential basis in the second quarter. On a yearly basis, the economy had expanded 1.4%, the weakest since 1992.

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