House prices are falling more rapidly than at any time since the early 1990s property crash, according to figures released by the Halifax yesterday.

Amid City fears that the Bank of England's decision yesterday to peg the cost of borrowing at 5% could push the economy into recession, the Halifax, Britain's biggest mortgage lender, reported that the cost of a home fell by 2.4% in May, wiping almost £5,000 off the cost of an average house.

Last month's decline marked the seventh fall in nine months. In the past three months, prices have dropped by 6.1% - faster than at any time since the bank began publishing data in 1983. The biggest fall during the downturn of the early 1990s was the 3.8% decline between August and October 1992, a period which included Black Wednesday.

Roger Bootle, economic adviser to Deloitte, said the 8% drop in house prices since their peak was likely to turn into a fall of 20% by the end of 2009, with knock-on effects on consumer spending. "The UK economy is on course for a very deep and prolonged economic downturn, if not an outright recession," he added.

According to Halifax's data, the average house now costs £184,111, down from £189,027 in April. A year ago it cost £196,893, showing that prices are down by 6.5% in the past year.

"It's now very clear that house prices are in vertical decline, with our worst expectations being confirmed every month," said Liberal Democrat treasury spokesman Vince Cable. He said the Bank's decision to keep rates on hold will mean little to large numbers of families who are having to remortgage at significantly higher rates of interest. Cable called on the government to give the Bank of England a measure of inflation which "takes full account" of what is happening in the housing market, saying that had ministers allowed interest rates to reflect the overheating of the housing market several years ago, the bubble would not have grown so large.

Martin Ellis, chief economist at Halifax, said the slowdown was partly caused by the tightening of the mortgage market, due to the credit crunch, and the increased pressure on consumer spending.

The latest figures from the Royal Institution of Chartered Surveyors (Rics) showed that first-time buyers were particularly thin on the ground. The number of new buyers showing an interest in buying a house has fallen for the last 17 months running.

Despite evidence that the manufacturing, construction and services sectors of the economy are struggling, the decision by the Bank's monetary policy committee to keep the bank rate at 5% came as no surprise to the City. The Bank is concerned about the cost of living, with inflation on the government's preferred measure already standing at 3% and likely to go higher over the coming months.

Mervyn King, the Bank's governor, is obliged to write an explanatory letter to the chancellor, Alistair Darling, if inflation deviates by more than one percentage point from its 2% target, something analysts believe may happen this month.

Ellis pointed out that the drop in house prices comes after several years of growth, with the average home rising £88,000 between August 2002 and August 2007.

The gloom in the housing sector was accentuated by Bellway, the UK's fourth-largest builder, which reported a 31% drop in home reservations. It now expects to sell up to 15% fewer homes this year than in 2007.