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According to a statement released today by Nationwide Building Society House prices in the UK have recorded their first annual drop for 12 years.

House prices dropped by 1.1% in April, the sixth reduction in a row and were down 1% from the previous levels seen in April 2007.

Nationwide stated the drop in prices reflected a weakening market which had been hit by “poor affordability and tighter financial market conditions”.

An average home in the UK  now costs £178,555, which is £1,759 lower than April 2007.

“April was another difficult month for the housing market,” said Fionnuala Earley, Nationwide’s chief economist.

She announced that there had been a “steep decline” in property buying in the last six months owing to falling demand from first-time buyers, higher mortgage rates and tighter lending criteria.

There is more unsold property staying on the market and this means more improved the bargaining power for buyers which will push down prices.

She said that the credit cruch is likely to have a knock-on effect on the wider economy, with consumers becoming more cautious with their money.

But rising oil and food prices meant that the Bank of England would “prefer to cut rates at a more gradual rate than homeowners might prefer”, she predicted.

David Blanchflower, a member of the Bank’s Monetary Policy Committee which sets interest rates for mortgages each month, said in a speech on Tuesday that house prices could fall by a third over the next few years if interest rates were not cut.

He stated”I am not suggesting that such a drop will necessarily occur, but it may. Cutting interest rates now may help to prevent such a dramatic fall.”

Mr Blanchflower said “aggressive action” was needed to stop a downturn in the economy.

The figures come a day after the Bank’s own data stated that new mortgage approvals had fallen to their lowest level since records began in the early 90’s.

“Prices have been rising consistently in the last four of five years, so a bit of a fall is due. It is what markets do,” said Peter Rollings, managing director of Marsh and Parsons Estate Agents.

Ed Stansfield, property economist at Capital Economics, said he expected house prices to fall 20% from their peak by the end of 2009.

“With confidence faltering, the economy now slowing and no sign that the tightening in lending criteria is coming to an end, it is hard to see what will prevent further house price falls,” he said.

The Halifax announced that house prices fell by 2.5% in March compared with the previous month April, and the mortgage lender is set to release its figures for April in the next few days.

The Nationwide, stated that the Bank of England’s £50bn plan for banks to swap potentially risky mortgage debts for secure government bonds was “well thought out”.

She said it would stabilise the volatile mortgage market of the past few weeks, but it would not lead to house prices and mortgage lending returning to the levels seen this time last year.

She added that, unlike the 1990s crash, more people were on fixed-rate than variable-rate mortgage deals and this helped the stability of the market.

The governor of the Bank of England told MPs on Tuesday that it would be a mistake to go back to where the mortgage market was a year ago, when loans were cheaper and easier to get.

Prime Minister Gordon Brown told the BBC’s Today programme that the housing market was one of a number of economic issues “to deal with” along with help for pensioners and low-income families on fuel bills and petrol prices.