U.K. House Prices Drop Most Since 1991 as Confidence Weakens

By Brian Swint and Svenja O'Donnell

July 31 (Bloomberg) -- U.K. house prices declined the most in almost two decades in July and consumer confidence fell to a record low as the economy edged closer to a recession.

The average value of a home dropped 8.1 percent from a year earlier, the biggest decline since at least 1991, Nationwide Building Society, Britain's fourth-biggest mortgage lender, said today. An index of confidence based on a survey of 2,001 people fell 5 points to minus 39, the lowest since the data began in 1974, GfK NOP Ltd. said.

Britain's economic outlook has deteriorated in the past month after ``bad news'' on retail sales and other data, Bank of England policy maker David Blanchflower said yesterday. The economy's weakness has helped erode support for Prime Minister Gordon Brown, whose ruling Labour Party had the lowest support since the early 1980s in a Populus Ltd. poll published this week.

``These data reinforce our view that the U.K. economy is going into recession,'' Michael Saunders, chief western European economist at Citigroup Inc., said in a research note. ``With monetary and fiscal policy both hamstrung, most of the economic pain still lies ahead.''

On the month, house prices dropped 1.7 percent from June, the ninth consecutive decline, bringing the average value of a home to 169,316 pounds ($335,400), Nationwide said.

Mortgage lenders stung by the credit-market rout have exacerbated the property downturn by raising borrowing costs. The rate on a home loan fixed for two years rose to 6.63 percent in June, the highest since February 2000, Bank of England data on July 9 showed.

S&P Report

About 1.7 million U.K. homeowners are likely to see the value of their houses fall below the amount they owe on their mortgage, Standard & Poor's said yesterday.

``The weakening economy and poor housing market sentiment do not suggest that the market will recover quickly,'' said Fionnuala Earley, chief economist at Nationwide. ``The risk of an economic recession in the U.K. is now clearly rising.''

GfK's main measure of consumer confidence is now 4 points below the result for March 1990. Gauges of the general economic situation and the climate for major purchases dropped to the lowest on record, the report showed. The index of consumers' personal financial situation over the next 12 months fell nine points to minus 18, the lowest in 14 years.

The Confederation of British Industry's retail sales index dropped to the lowest in 25 years in July, and banks granted the fewest mortgages since at least 1999 last month, reports this week showed.

Inflation Risk

Bank of England Governor Mervyn King is refusing to rule out a recession and said in May that the economy may experience ``the odd quarter or two of negative growth.'' At the same time, inflation surged to 3.8 percent in June, the most in more than a decade and almost double the central bank's 2 percent target.

The central bank left the benchmark interest rate unchanged at 5 percent at its meeting on July 10. The Monetary Policy Committee will next decide on rates on Aug. 7.

``There has been some pretty bad news since our last meeting,'' Blanchflower said in an interview on the BBC's Radio Ulster station yesterday. ``There's been fairly bad news on retail sales and on a number of things. So we're going to reconsider and take another vote'' next week.

To contact the reporters on this story: Brian Swint in London at bswint@bloomberg.net; Svenja O'Donnell in London at sodonnell@bloomberg.net.