The decline, which was bigger than most analysts were expecting, heightened concern the economy is heading for recession.

The average house in August fetched 10.5% less than it did a year ago, the Nationwide Building Society has reported which is the biggest drop since the final quarter of 1990.

The average price had dropped 1.5% in July and 0.9% in June for an annual drop of 8.1%.

House prices have now declined for 10 months in a row and lost 10.3% of their value since the beginning of the year, to leave the average property costing £164,654.

Earlier this month in its quarterly inflation report The Bank of England warned that growth is likely to remain stagnant over the next year amid declining real incomes, further tightening of credit conditions and steeper-than-expected declines in home prices and activity in the housing market.

With unemployment rising and a recession looming, banks have tightened their lending criteria. Many now refuse to offer mortgages to homebuyers with less than a 25% deposit.