The sharp fall in house prices has slowed this month, Nationwide said yesterday, but experts predict that they still have further to fall. Britain’s biggest building society said that prices dropped 0.4% this month and 13.9% over the past 12 months. This was better than expected - analysts had forecast a monthly drop of 1.6% and an annual fall of 14.9%.

However, economists believe that prices have not yet bottomed out. “With the economy set for a deep recession …we expect the sharper downward trend in house prices of recent months to reassert itself,” said Seema Shah, property economist at consultants Capital Economics.

Further cuts to interest rates are unlikely to boost the housing market as not all banks are passing them on in full. The British Bankers’ Association said this week that lending plunged 52% in the year to October as the lack of mortgages available on the market was deterring would-be buyers from making a purchase.

The Bank of England’s monetary policy committee slashed 1.5 percentage points off rates this month to leave them standing at 3%, and analysts are forecasting that it will cut at least another half point when it meets next week.

The situation was high on the agenda when Gordon Brown, the prime minister, and housing minister Margaret Beckett met leading figures from the housebuilding industry to discuss ways in which to revive the flagging sector.

Steve Turner, of the Home Builders Federation, said it was vital to restore mortgage lending in order to aid recovery in the housing market. “For this reason we believe it is imperative that the government acts on [Sir James] Crosby’s recommendations immediately and does not wait until next spring,” he said, referring to Crosby’s plan that the government should provide £100bn of guarantees to the mortgage-backed securities that were used to fuel home loans before the credit crunch. Turner added that Brown also restated the commitment that Alistair Darling, the chancellor, made when announcing the banks’ refinancing package in September that he would use government influence on the banks to restore some sensible levels of lending.

However, the consensus of the meeting, which was also attended by the Council of Mortgage Lenders, Construction Skills and HBOS, was that not much can be done until banks start lending again.

Meanwhile, the National Fraud Strategic Authority said that mortgage fraud is booming as the downturn persists.

John Cassey at Protiviti, a risk consulting company, said: “Over the last six months we have seen a marked increase in the number of fraudulent mortgages … Developers, solicitors and property agents have colluded to overvalue new build properties in order to secure higher mortgage advances. The developer is then paid off on the lower value and the criminals vanish with the balance.”

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Northern Rock will increase interest on fixed-rate mortgages by between 0.2% and 0.3%

US authorities escalated their economic firefighting programme yesterday by pumping $800bn (£500bn) into the mortgage and consumer credit markets, amid further confirmation of a rapidly deteriorating outlook.

The latest move exceeds the $700bn troubled asset relief programme, or Tarp, that performed a taxpayer-backed rescue on the US banking system and, according to economists, underlines how the credit crisis has spread from the corporate to the consumer sphere.

US treasury secretary Henry Paulson announced plans to pump $200bn into the consumer credit market after admitting that millions of Americans could not borrow any money last month. The Federal Reserve, the US central bank, also announced that it will buy up to $600bn worth of mortgage-backed assets in an attempt to free up the mortgage lending market and, it hopes, bring down the cost of home loans. However, another wave of dire economic data overshadowed the news as house prices tumbled by a record 16.6% in the third quarter and it was revealed that the US economy had performed worse than expected over the same period.

Pledging that the $200bn infusion was just the “starting point”, Paulson said: “The market essentially came to a halt in October. As a result millions of Americans could not find financing for their everyday needs.” The $200bn will be aimed at the credit markets underpinning car loans, student loans, credit cards and loans to small businesses, which effectively dried up in October.

Paulson denied that the $600bn acquisition of mortgage-backed securities and debt owned by mortgage lenders showed that the nationalisation of the two biggest backers of home loans in the US, Fannie Mae and Freddie Mac, had failed. “It is aimed at getting [mortgage] rates lower and it is a great deal for the taxpayer.”

US authorities expect lenders to use the money from the sale of toxic assets to fund new, cheaper mortgages. They also hope that lending $200bn to holders of securities backed by income from student, car and credit card debt will also bring down the cost of new loans.

The glut of government initiatives, which included a $326bn bail-out of Citigroup on Monday, is taking place against the backdrop of a worsening economic outlook. It was confirmed yesterday that the US economy performed worse than initial estimates in the third quarter. Gross domestic product in the three months to September fell 0.5%, said the commerce department, instead of the 0.3% decline in earlier forecasts. The decline in GDP is the fastest since the 9/11 attacks and included a downward revision in consumer spending, which generates two-thirds of US economic activity, from 3.1% to 3.7%.

The economy is expected to contract in the final quarter of the year and well into 2009, more than fulfilling the technical definition of a recession, which is two successive quarters of negative growth.

GDP will shrink by 4% in the final quarter of the year, according to some estimates, ratcheting up the pressure on President-elect Barack Obama to come up with a bold economic stimulus programme.

“The Obama administration is beginning to understand that the stimulus package has to be very, very big,” said Nariman Behravesh, chief economist at economic forecaster Global Insight. “Estimates of about $500bn to $700bn are about right. Anything less than that is like a popgun.”

Speaking yesterday, the president-in-waiting said it was “imperative” that wasteful spending be cut and that the federal budget reformed. “We cannot sustain a system that bleeds billions of taxpayer dollars on programmes that have outlived their usefulness, or exist solely because of the power of a politician, lobbyist or interest group.”

The latest slump in US house prices underlined the depth of the economic trough and threatens to tip millions more home owners into the negative equity spiral that set off the credit crisis last year. The Standard & Poor’s/Case-Shiller home price index fell by a record 16.6% in the third quarter, year on year. Prices are at levels not seen since the first part of 2004.

The Dow Jones lost early gains amid the sobering news. In London, the FTSE 100 closed up by 18 points at 4171 as the US data reined in a more positive start.

The Federal Reserve and US treasury yesterday launched a sister to the Tarp called the term asset-backed loans facility, or Talf. It will be funded by a $20bn contribution from the Tarp that will be leveraged by the Fed to create a $200bn facility. Talf cash will be offered to holders of securities backed by car loans, student debts and credit card borrowings who, it is hoped, will open their lending books again.

Economists said the government was attempting to jump-start a consumer loan market whose frozen state is threatening to exacerbate a looming recession.

John Silvia, chief economist at Wachovia Bank, said the “extraordinary” paralysis in consumer credit markets left the government with no choice other than direct intervention. “There is simply no lending going to the ultimate consumer. What we saw after September was no one knew what the counterparty risk was or where the economy was going,” he said, referring to the aftermath of the collapse of Lehman Brothers. “You cannot expect to have lending in that environment. The Fed and the Treasury therefore thought they had to get involved.”

Paulson said the treasury was examining how the $700bn Tarp fund could be used to prevent home foreclosures. So far $350bn of the fund has been spent on shoring up the balance sheets of banks including Citigroup and Morgan Stanley.

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