Reuters

FOR years the housing market in Britain has defied gravity. For a few months in 2004 and 2005 house prices moderated, before taking off again. But now, finally, tighter credit and overstretched household budgets are pulling prices down.

A collective shudder ran down the spines of British homeowners on Tuesday April 8th when Halifax, a part of HBOS and the country's biggest mortgage lender, revealed that house prices fell in March by 2.5%. The monthly decline recorded by the Halifax house-price index was the biggest since September 1992, when the housing market was enduring an agonisingly prolonged bust.

In fact, monthly house-price figures are notoriously erratic and should be taken with a big grain of salt. The more important finding from the index was that the annual rate of inflation—comparing the first quarters of 2008 and 2007—has fallen to 1.1%, the lowest since March 1996, when it was 0.3%. That fits with the picture painted by the house-price index of the Nationwide Building Society, another big lender. This has now recorded five consecutive monthly declines, lowering the annual rate to 1.1% in the year to March.

Mortgage lenders are reluctant to talk down the market, so it says something that both the Halifax and Nationwide are predicting “modest” declines in house prices this year. Forward-looking indicators suggest a gloomier picture. The number of mortgages approved for house purchase was almost 40% lower in February than a year before. According to the Royal Institution of Chartered Surveyors, estate agents have been grappling with the worst conditions—measured by the ratio of completed sales to unsold stock—since September 1996.

Last week a study by the International Monetary Fund found that Britain's housing market was the third most over-valued of 17 developed economies, narrowly behind Ireland and the Netherlands. House prices were almost 30% higher than could be explained by fundamental factors such as disposable income, interest rates and working-age population.

These findings are not shocking given the extraordinary house-price boom of the past decade. Between the first quarter of 1997 and the first quarter of 2007, house prices rose by 214%. This was the third highest among 20 countries covered by The Economist. It contrasts with a rise of 135% in America up to its peak in 2006.

During the long surge in house prices, the usual siren voices insisted that “this time it is different”, despite Britain's previous record of booms and busts. Even though prices soared to apparently unsustainable levels—judged by conventional benchmarks, such as the ratio of house prices to average earnings—they still appeared affordable when debt-servicing costs were compared with income, thanks to low interest rates. Furthermore, a surge in population growth caused by immigration together with sluggish homebuilding rates supposedly warranted the vaulting valuations. This overlooked the fact that the market also looked greatly overvalued when house prices were compared with rents.

The reality was that the market was lifted artificially high by a tide of cheap credit. In particular, borrowers benefited from cut-price home loans made possible by mortgage securitisation, notably from Northern Rock, the lender that was brought low last year by the financial crisis. Now that tide of cheap credit is receding fast as banks and building societies reprice their mortgages and toughen their lending conditions. Spreads on “tracker mortgages” that are linked to the Bank of England's base rate have risen and lenders are penalising borrowers who can afford only a small deposit.

Some relief may come on Thursday if, as expected, the central bank cuts the base rate from 5.25% to 5.0%. But that would probably do no more than counter the effects of the lenders' latest moves to constrict credit. Mervyn King, the Bank of England's governor, said in March that the bank's two previous quarter-point reductions, in December and February, had done no more than offset the impact of tighter credit conditions, leaving average interest rates paid on mortgages much the same as before.

A period of falling house prices has been long overdue and may be welcomed by those who have been priced out of the market. But past experience suggests that it is likely to inflict economic damage by slowing consumption and GDP growth. When the market slowed in 2005 household spending rose by only 1.5%, its lowest since 1992. That augurs ill for Britain's economic prospects—and for Gordon Brown's increasingly beleaguered government.