3m homes now worth less than the buyers paid for it

Around three million people who bought a home in the last two years have seen its value plummet below what they paid for it, research revealed yesterday.

Britain's biggest building society Nationwide said prices have dropped 4.5 per cent since May – the fastest fall in three months since records began in 1973.

Since prices peaked in October, the cost of the average home has plunged by around £17,000 to £169,316. This is the lowest since August 2006, a cruel blow for the millions who bought a home over the last two years.

Every day, hundreds are being plunged into negative equity by what is likely to be the worst property crash ever seen in Britain.

In July, 45,000 homeowners saw the value of their property fall below the sum they borrowed to buy it.

This represents a rise of almost two-thirds in a single month, taking the total to 115,000, according to the ratings agency Standard & Poor's.

True, we are a long way from the days of Ted Heath and the three-day week, when the average semi cost just £10,875 and petrol was 79p per gallon, but house prices are falling – and are expected to continue doing so for some time to come. A recent survey estimated that one in eight people, about 145,000, who took out a mortgage since the beginning of last year are in negative equity: that is, their debt is more than the current value of their home. 

Looking further ahead, and plugging in Savills’ predictions of a 15% fall in prices next year, things begin to look decidedly more negative. Lucian Cook, the agency’s director of residential research, says this would mean average prices by the end of the year would be down to levels last seen in early 2004 before they bottom out and gradually begin to rise again.

All this makes depressing reading for those who put off selling this spring in the hope things would pick up by autumn. It is good news, though, for potential buyers – at least, those who have access to finance. “Purchasers will be divided between those who are prepared to trade now and take a medium-term view on values, and those who hang out for the bottom, but run the risk of buying into a lower-supply market in 2009 or 2010.

Lloyds TSB became the latest victim of panic over banks' capital cushions  when a £585 million credit crunch hit made it the FTSE 100's biggest faller.

One analyst warned investors that the bank could be forced to halve its dividend and tap shareholders for £3.3 billion if a recession caused an increase in bad debts. Shares in Lloyds TSB closed down 4.7 per cent at 306p.

The bank announced a £505 million decline in the value of its insurance investment portfolio and £269 million in one-off policyholder tax payments. Lloyds TSB confirmed that it would take a £180 million hit when it settled a case brought by US regulators over payments to blacklisted countries such as Iran and Cuba. As a result the pre-tax profit fell 70 per cent to £599 million for the six months to June 30. Without these one-off items, some of which are reversible, profit was down by 19 per cent to £1.5 billion.

Alliance & Leicester (A&L), the UK mortgage lender that is being bought by Spain's Santander, today revealed its interim profits have been virtually wiped out after taking a £209 million hit on risky assets and higher funding costs.

Pre-tax profits for the six months to June 30 plunged from last year's £290 million to just under £2 million.

HBOS, Britain's biggest mortgage lender, yesterday added to the spate of warnings on falling UK house prices as it reduced the number of new home loans it sold in the first half.

The bank, which owns Halifax and the Bank of Scotland, reported a 51 per cent fall in pre-tax profit to £1.4 billion after taking a £1 billion hit on investments affected by the credit crunch.