House prices suffer biggest drop since 2009

A woman holds an umbrella as she walks past the window of an estate agents office in Manchester, northern England June 7, 2011.

LONDON (Reuters) - House prices fell at their fastest annual pace in nearly three years last month, data from mortgage lender Nationwide showed on Wednesday, as the effects of nine months of recession spread further across the economy.

Nationwide reported a 0.7 percent decline in house prices in July, a much bigger drop than that forecast by any economist polled by Reuters. Prices are now 2.6 percent lower than a year ago - their biggest annual fall since August 2009.

Britain's economy entered recession at the end of last year, and shrank a bigger-than-expected 0.7 percent in the second quarter of 2012, as bad weather and an extra public holiday added to the effects of public spending cuts and the debt crisis in the euro zone.

"The weaker price trend observed in recent quarters is unsurprising, given the disappointing performance of the wider economy," said Nationwide's chief economist, Robert Gardner.

House prices and the rest of the economy were only likely to recover modestly in the coming quarters, as the euro zone crisis would limit gains from more Bank of England stimulus and a government programme aimed at increasing mortgage and business lending, Nationwide added.

Earlier this week, the Bank of England reported that mortgage approvals and lending - leading indicators for house prices - fell to an 18-month low in June.

house prices are now 13 percent below their 2007 peak, compared to a decline of more than 15 percent in the United States and nearly 25 percent in Spain, Nationwide said.

Along with a lack of house building before the financial crisis, this resilience was probably also due to the relatively small rise in unemployment since the financial crisis, Nationwide said.

(Reporting by David Milliken; Editing by Catherine Evans)