Aug. 28 (Bloomberg) — U.K. house prices posted the biggest annual decline in almost two decades in August after tighter mortgage lending and the prospect of a recession discouraged home buyers, Nationwide Building Society said.

The average value of a home dropped 10.5 percent to 164,654 pounds ($301,500), the biggest drop since the final quarter of 1990, Britain’s fourth-biggest mortgage lender said today. On the month, prices fell 1.9 percent, compared with 1.5 percent in July.

The fastest inflation in more than a decade, a stagnant economy and the rationing of mortgages by banks have sparked the worst property slump since the last recession in the early 1990s. Bank of England Governor Mervyn King said this month that home values face “a significant adjustment” after a decade-long boom.

“Recent activity levels in the housing market have been very subdued,” said Fionnuala Earley, chief economist at Nationwide, in a statement. “Overall confidence in economic and housing market conditions is low.”

This month’s annual price decline was also the first double- digit percentage drop since 1990. The U.K.’s economy ground to a halt in the second quarter, ending the nation’s longest stretch of growth in a century after tighter credit deterred spending and investment.

Today’s report chimes with others showing the housing market is worsening. Residential prices fell an annual 10.9 percent in July, mortgage lender HBOS Plc said this month. Taylor Wimpey Plc, the country’s largest homebuilder, yesterday reported a first-half loss of 1.42 billion pounds after writing down the value of land and expects no improvement in the market “in the short term.”

Weaker Currency

The pound has declined as prospects for the U.K. economy worsen. The currency, which touched a record $2.1162 in November, has dropped 7.5 percent against the dollar this month and slipped to $1.8308 today.

British banks have curtailed lending after the U.S. subprime mortgage collapse ricocheted through the global economy, sparking more than $500 billion in writedowns and credit losses. Home-loan approvals held close to the lowest in at least 11 years in July, the British Bankers’ Association said Aug. 26. Banks granted 22,448 mortgages last month, down 65 percent from a year earlier.

Policy makers are showing little inclination to help the housing market with interest-rate cuts. The Bank of England has kept its benchmark at 5 percent since April as officials weigh the risks of faster inflation with those of economic contraction.

Inflation accelerated to 4.4 percent in July, more than double the government’s 2 percent target. Gross domestic product was unchanged in the second quarter from the first three months of the year, the Office for National Statistics said Aug. 22. That compares with an initial estimate of 0.2 percent growth.

Bank of England policy makers said at their last rate decision on Aug. 7 that there are “significant risks to the inflation outlook,” minutes of the meeting showed.