The number of people in arrears compared with the previous quarter, also rose by 8% to 168,000. Repossessions have climbed as more borrowers struggle to meet their mortgage repayments - as low-interest rate deals come to an end and unemployment increases.

Last property slump

While the number of homes being repossessed by lenders has increased progressively in the past few years, they remain lower than they were in the depths of the last property slump in the early 1990s.
The number of repossessions this year now stands at 30,200. By contrast 75,500 homes were taken back by lenders in 1991.

The news follows data indicating that Germany and Italy, two of the biggest Eurozone economies, are already in recession. Germany is the manufacturing dynamo of the European economy. When there are problems there, it pulls the rest of the Eurozone down with it. This is the first recession seen since the Euro’s creation in 1999.

Analysts forecast further gloom ahead. Further quarters of negative GDP growth are expected, until the third quarter of 2009. Current forecasts indicate that the Eurozone region will shrink by 1% next year. The gloomy forecasts are founded in uncertainty relating to the recent financial turmoil on money markets and slowing exports exacerbated by the strengthening euro against the dollar and pound.

Analysts are now believe that a sharp decline in household spending and a property crisis are likely to push the Spanish economy into recession in the next quarter. Meanwhile, the wider European Union (EU), made up of 27 nation states, is also in danger of falling into a recession with the region’s output shrinking by 0.2% in the third quarter.

The member states of the Eurozone are Germany, France, Italy, Spain, Belgium, the Irish Republic, the Netherlands, Luxembourg, Portugal, Slovenia, Malta, Greece, Austria, Finland and Cyprus.

In its quarterly inflation report, the Bank stated that the economic climate has changed markedly since August. The Bank now expects inflation to decline to 1% by 2010, well below its 2% target.

The Bank of England projects that the UK economy will contract 2% by early next year. Unemployment figures have hit an 11-year high, while sterling continues to decline on international markets.

Markets are expecting interest rates to drop below 2% within a year, the lowest Bank of England base rate since it was established in 1694.

Last month the base rate was cut from 5% to 4.5%. There had been widespread calls from industry for a major interest rate cut as the UK faces the prospect of a prolonged recession.

It is the first time the Bank of England has cut rates by more than half a percentage point since it gained its independence from the Government in 1997. The Bank stated that it considers that the risks of high inflation have now disappeared.

The cut should help to improve conditions in the credit markets, and allow banks to reduce their lending rates. Lloyds TSB is the first of the big lenders to promise to pass on the rate cut in full to its variable rate mortgage customers.

The move has been broadly welcomed by business and the trade unions.

The Building Society stated that the price falls were being driven by the drop in sales, currently at their lowest for 34 years. The price of an average house is now £158,900 - nearly £30,000 less than a year ago.

Recent figures from the Bank of England show that mortgages approved, but not yet lent, were down by two-thirds on the levels of a year ago.

The credit crunch continues

Unfortunately, the crisis in the banking system is showing little sign of improvement, despite the dramatic interventions of central banks and governments around the globe. Banks are still restricting their new mortgage lending, a trend which is likely to continue in the next few months.

On a more optimistic note, interest rates are likely to continue to be cut sharply, as recession bites.

Changes in house prices are not taken into account in calculating the rate of inflation. Neither do mortgage repayments figure in that calculation – surprising considering that they form a significant proportion of the monthly outgoings of the average family.

For most people, the prices of buying and selling in the housing market are relative. If your house drops in value, it is likely that the new house that you are purchasing will have dropped in value too. The key factor is the difference between the two - the amount you have to borrow in order to make the move.

The ups and downs of the housing market

There have been 11 years of increasing house prices. Properties in the UK have nearly tripled in value over that period. We have now entered a period of rapid downturn where property values could fall by up to 50% from their peak last year. The people likely to suffer the most are those who purchased houses in the last three years and are now experiencing negative equity, those who borrowed against the value of their home to finance their business, to buy a second home or to pay off debts. Many will find that they paid more (and in many cases borrowed more) than their homes are now worth.

Again, for the majority whilst their houses are now worth less, when the time comes to move, the house they want to buy will also cost less. As a consequence, they are unlikely lose out overall. The upside of the drop in house values is that it will make things easier for the first time buyer, the lifeblood of the housing market.

The FSA also said that the number of borrowers struggling with home loan arrears had risen. Homeowners are urged to contact their lender as soon as they find themselves in difficulty with repayments. The Council of Mortgage Lenders has estimated that 45,000 homes will be repossessed in the UK in 2008, a rise of 27,100 over last year’s figure.

Negative equity

The Bank of England has reported that UK house prices are showing a sharper decline than properties in the US. The Bank has estimated that 500,000 homeowners in the UK are in negative equity as a result of a 13% fall in UK property prices since their peak in October last year. It predicted that this number will increase to 1.2 million - 1 in 9 UK homeowners - if house prices decline by another 15% over the coming months.

Economic output fell by 0.5%, according to the Office for National Statistics, a bigger-than-expected drop, hitting UK shares and weakening the pound. It is the biggest drop in UK gross domestic product (GDP) since the first quarter of 1990.

The 0.5% fall has increased expectations of further interest rate cuts from the current level of 4.5% to stop the slide. Rates could go as low as 3% by the middle of next year and possibly even lower, stated a UBS analyst.

Global slowdown

The slowdown in the UK comes as fears of a global recession ravage financial markets around the world. Ireland is already in recession, France is close to recession and the US - the world’s largest economy - is  now believed to be in recession.

Concerns about the British economy have pushed the pound to a five-year low against the US dollar.