According to Hometrack, UK house prices fell at its fastest rate in three years in December 2007 and the threat of further declines may cause the property market to seize up in 2008.

The average cost of a home in England and Wales slipped for a third month, dropping 0.3% to £175,200. Hometrack forecasts that the number of property transactions will fall 17% and prices will rise just 1% next year.

Bank of England policy makers said a drop in house prices seemed ‘more pronounced’ than expected as they cut their benchmark interest rate for the first time in two years. Record debt, higher mortgage costs and the property markets worst performance since 1995 have discouraged homebuyers. “The second half of the year has seen a major reversal in confidence”, said Richard Donnell, director of research at Hometrack. “Just as the financial markets have faced a liquidity squeeze, so the housing market is in danger of facing its own liquidity squeeze.”

Prices increased 3% from the previous year, which is the least in 18 months, Hometrack said. The average selling time for a home rose to 8.3 weeks, the most since the survey of real-estate agents and surveyors began in 2001.

The number of property transactions will fall because uncertainty among sellers about the health of the market will cause a ‘major lack’ of homes for sale in the first quarter, Donnell said. “This will act as a support to prices, while also leading to greater price volatility in those markets where there is the greatest lack of supply.”

Donnell concluded: “Levels of market activity are likely to remain subdued over the course of 2008, especially over the first half of the year. Lower interest rates and continued growth in household incomes will help to ease affordability pressures but it is a trend that will need to run for a good 12 to 18 months.”