The fall, described as a “car crash” by one estate agent, came after property values had previously hit a record high in April.
Across the UK, property values fell by 1.7 per cent month-on-month in May, the report from Nationwide Building Society said.
It was the biggest month-on-month fall since February 2009 and pushed the average house price in May down to £218,902. In April, the average UK house price was £4,013 higher, at £222,915.
April’s house price index was a record high in cash terms.
Nationwide’s chief economist Robert Gardner said: “UK house prices fell by 1.7 per cent over the month in May, after taking account of seasonal effects. This is the largest monthly fall since February 2009. As a result, the annual rate of house price growth slowed to 1.8 per cent, from 3.7 per cent in April.
“In the opening months of 2020, before the pandemic struck the UK, the housing market had been steadily gathering momentum.
“Activity levels and price growth were edging up thanks to continued robust labour market conditions, low borrowing costs and a more stable political backdrop following the general election.
“But housing market activity has slowed sharply as a result of the measures implemented to control the spread of [coronavirus].
“Indeed, data from HMRC showed that residential property transactions were down 53 per cent in April compared with the same month in 2019.”
Mr Gardner said the medium-term outlook for the housing market remained highly uncertain and much would depend on the performance of the wider economy.
He said: “The raft of policies adopted to support the economy, including to protect businesses and jobs, to support people’s incomes and keep borrowing costs down, should set the stage for a rebound once the shock passes, and help limit long-term damage to the economy.
These same measures should also help ensure the impact on the housing market will ultimately be less than would normally be associated with an economic shock of this magnitude.”
Jeremy Leaf, a north London estate agent and a former residential chairman of the Royal Institution of Chartered Surveyors, said: “The extent of the car crash that hit the property market in May is laid bare in Nationwide’s report of the largest monthly fall in house prices for over 11 years.”
He continued: “Uncertainty remains as to the direction of travel for values in some price ranges and locations until momentum begins to build again. The market feels a bit like returning after the Christmas/new year break, with buyers and sellers waiting to see who will blink first as prices establish their post-Covid level.”
Mark Harris, chief executive of mortgage broker SPF Private Clients, said: “As physical valuations return, lenders are able to offer higher loan-to-values once more, returning to larger loans on the high street and in some instances interest-only borrowing.
“With some lenders cutting mortgage rates to ever lower levels, they are sending out a clear message to borrowers that they are open for business.”
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: “The big month-to-month drop in Nationwide’s house price index in May – the largest since February 2009 – surely is just the start of a protracted decline over the remainder of this year.”
He added: “Unless a full V-shaped recovery emerges in the next six months, the unemployment rate likely will exceed its peak of 8.5 per cent in the wake of the last recession. Admittedly, banks are in a much better position than 12 years ago to lend, given their high capital ratios and their ability to access cheap funds from the Bank of England’s latest Term Funding Scheme.”
Mr Tombs said: “Relatively few people likely will be forced to sell their homes, given that mortgage payment holidays are easily available and home ownership has declined.”
Borrowers who are taking a three-month mortgage payment holiday will meanwhile be able to extend it for another three months or start making reduced payments, the City regulator has confirmed.
The Financial Conduct Authority said it would press ahead with proposals it had previously made to extend support for people who are either coming to the end of a payment holiday or who are yet to request one.