"The fear factor" is driving down property prices in Dorset with house values set to fall by five per cent by the end of this year.

That's the view of David Slade, senior partner with Slades estate agents, after figures from the Nationwide Building Society showed that house prices nationally have dropped for the fifth month in a row. Mr Slade said: "We are busy with viewings but instructions are below normal and the volume of sales is considerably down.

"Prices have fallen but asking prices haven't which is creating a frozen market. I anticipate a drop of five per cent in property values here over the next six to 12 months.

"But the price adjustment is positive for first-time buyers. The only people who are suffering are those who bought in the last two years who could find themselves in negative equity.

"The fear factor is definitely affecting the market; there is a shortage of applicants and selling times are taking longer.

"But I don't think there is going to be a property crash. These cycles normally last about a year and this one started last summer following the introduction of home information packs."

Nationwide statistics show that annual house price growth fell to its lowest level for 12 years during March as prices dropped for the fifth successive month.

The average value of a home inched ahead by just 1.1 per cent in the year to the end of March, its lowest rate since March 1996.

Nationwide's chief economist Fionnuala Earley said: "The outlook for UK house prices is clearly more downbeat than at the time of our November forecast.

"Some of the downside risks we identified then have become a reality - most notably the continued turmoil in the financial markets."

The group now expects house prices to end the year up to four per cent lower than they started it.

The British Bankers'Association has revealed that the number of mortgages approved during February fell by a third, compared to the same month in 2007.