U.K. Annual House Prices Declined by Most Since 1992

By Svenja O'Donnell

July 1 (Bloomberg) -- U.K. house prices fell in June by the most since the end of the last recession as banks starved the property market of loans, Nationwide Building Society said.

The price of an average home declined 6.3 percent from a year earlier to 172,415 pounds ($343,278), the biggest drop since November 1992, Britain's fourth-biggest mortgage lender said today in a statement. Prices dropped 0.9 percent from May.

Real-estate stocks had their worst performance in more than 20 years in the second quarter and Bank of England Governor Mervyn King predicts ``extremely weak activity'' in the housing market. Mortgage approvals fell to the lowest in at least nine years in May and consumer confidence deteriorated to the lowest level in 18 years last month, reports showed yesterday.

``I can't see this price decline coming to an end any time soon,'' said George Buckley, an economist at Deutsche Bank AG in London who predicts values may fall at least 10 percent this year. ``The biggest driver in prices tends to be approvals and yesterday's figure was quite shocking.''

House prices fell for the eighth consecutive month, according to Nationwide. The pace of decline on the month was slower than the 2.5 percent drop in May, the most since Nationwide's index started in January 1991.

Property stocks extended their slide today. Shares of Taylor Wimpey Plc, the U.K.'s largest homebuilder, declined 4 percent and U.K. building materials distributor Travis Perkins Plc, which has lost almost three fifths of its value this year, fell 3.5 percent.

`Hand in hand'

Falling house prices risk pushing the U.K. economy into recession, as slowing growth and falling confidence curbs Britons' spending. King said June 19 that ``lower demand in the high street will go hand in hand with lower demand in the property market.''

Banks granted 42,000 loans for house purchase in May, compared with 57,000 in April, Bank of England data showed yesterday. An index of consumer confidence fell to minus 34 in June, the lowest since the London riots in 1990 before Margaret Thatcher's downfall as prime minister.

``The tightening of credit conditions over previous months, along with changing expectations of house price growth and a general weakening in consumer confidence in the economy have hit mortgage demand and led to a severe slowing in the levels of housing market activity,'' Fionnuala Earley, Nationwide's chief economist, said.

King told lawmakers on June 26 that there may be ``big movements'' in house prices as the property market goes through a ``period of adjustment.'' The Bank of England predicted in May that the annual rate of economic expansion will drop to around 1 percent, the lowest since 1992.

Still, accelerating inflation makes it more difficult for policy makers to kick-start economic growth by cutting rates. Consumer prices jumped 3.3 percent in May from a year earlier, the most in more than a decade.

Policy makers John Gieve, Timothy Besley, Paul Tucker and Kate Barker, who testified with King on June 26, all said they had considered a vote for higher interest rates last month. The panel kept the benchmark rate at 5 percent for a second month.

To contact the reporter on this story: Svenja O'Donnell in London at sodonnell@bloomberg.net.
Last Updated: July 1, 2008 03:54 EDT