House prices: how low can they go?

By Jennifer Hill, Personal Finance Correspondent

LONDON (Reuters) - As the months pass, news filtering out from property and mortgage markets continues to paint a gloomy picture.

Leading indices show record declines in house prices and the number of housing transactions is running at around 40 percent lower than this time last year, according to figures from the Council of Mortgage Lenders (CML).

But just how far could prices fall?

Lending, at 25.5 billion pounds in May, was some 20 percent lower on the year. Remortgaging accounted for most of that as homeowners sit tight and new buyers avoid taking their first steps on the ladder amid the downbeat outlook and jump in the cost of borrowing.

The cost of fixed-rate mortgages has hit a 10-year high -- and is set to climb further, analysts say -- as lenders pull cheap deals and repeatedly replace them with higher rates.

Nationwide, Halifax, the Woolwich and Abbey have all hiked the cost of some of their deals since the start of this month, blaming the rise in money market rates.

It is this ongoing fallout from the credit crunch and rise in swap rates that have led to the unusual situation of fixed and tracker rates being much in line with standard variable rates (SVRs) -- those that banks and building societies normally charge only when borrowers come to the end of a special deal.

As a result, some lenders -- Royal Bank of Scotland, Woolwich, Halifax, Lloyds TSB and Cheltenham and Gloucester included -- have stopped offering SVRs to new customers.