A surge in the average house price in Croydon looks set to be reversed as the combination of Government cuts, low demand and lack of available credit bite into the market.

The cost of the average property in Croydon had risen 9.6 per cent in July compared to 12 months earlier, to £246,238 - the biggest annual change since March 2008.

It was the sixth consecutive month the average house price had gone up in the borough following almost 18 months of slump, figures collated by the Land Registry show.

But expected austerity measures planned by the coalition Government, which are set to be announced at the spending review in October, could see property prices nose-dive for up to two years, according to investment company Invesco Perpetual.

Head of investment Neil Woodford said he believed house prices could fall between 5 and 10 per cent over the next two years thanks to the increased chance of a double-dip recession.

He said: “I think, in an era where mortgage availability remains very tight and there is more supply on the market as a result of unemployment, changing job circumstances or people really wanting to cash in on what appears to be relatively high prices, these put downward pressure on the market, and I expect house prices to continue to fall.

“I do not think that they are going to fall out of bed or that there is going to be a crash, but I do think that house prices will decline this year and next year, and maybe even beyond that.”