U.K. House Prices Drop Most Since 1990, Retail Index Plunges

By Svenja O'Donnell

Aug. 28 (Bloomberg) -- U.K. house prices declined at the fastest annual pace in almost two decades and an index of retail sales plunged to a 25-year low in August as Britain's economy edged closer to a recession.

The average value of a home fell 10.5 percent to 164,654 pounds ($301,500), the biggest drop since the final quarter of 1990, Nationwide Building Society said today. A gauge of retail sales fell to minus 46 from minus 36 the previous month, the Confederation of British Industry said in a separate report. That's the lowest since its survey began in July 1983.

Today's reports indicate Britain is heading for its first recession since the early 1990s after stagnating in the second quarter as higher living costs hurt spending and the credit squeeze ripples through the economy. As the outlook worsens, economists at banks including Societe Generale SA and Bank of America Corp. now forecast the Bank of England will be forced to set aside inflation concerns and cut interest rates this year.

``The big issue is how long and how severe'' the U.K.'s recession is going to be, said Jim O'Neill, head of global economic research at Goldman Sachs Group Inc. ``We're in it. It shouldn't be news anymore.''

U.K. government bonds rose. The yield on the two-year gilt dropped 3 basis points to 4.46 percent at 12:30 p.m. in London.

House prices declined 1.9 percent from a month earlier, the 10th consecutive decline in values, Nationwide said. Meanwhile, retailers' pessimism deepened to the lowest on record, with the quarterly index of stores' business situation falling to minus 38 from minus 17 in May, today's report showed. The CBI survey was conducted between July 29 and Aug. 13.

Brutal Recession

``The CBI figures look even worse that what we saw in the troughs of the last recession, and that was brutal,'' said Ross Walker, an economist at Royal Bank of Scotland Group Plc in London.

The U.K. had five straight quarters of contraction starting in the third quarter of 1990. Home values lost 13 percent of their value in three years and unemployment almost doubled, rising to 9.9 percent in April 1993. The jobless rate was 2.7 percent in July.

The latest data are a further blow to Prime Minister Gordon Brown, who is battling to regain popularity with voters and quell talk of challenges to his authority from within the ruling Labour Party. He said on Aug. 20 that the government will announce measures to revive the economy next month.

Cutting Lending

Conservative Treasury spokesman George Osborne said today that ``what began as a fall in prices is fast becoming a housing crash.'' Bank of England Governor Mervyn King said this month that home values face ``a significant adjustment'' after a decade-long boom.

British banks have curtailed lending after the U.S. subprime mortgage collapse ricocheted through the global economy, sparking more than $500 billion in writedowns and credit losses. Home-loan approvals held close to the lowest in at least 11 years in July, the British Bankers' Association said Aug. 26. Banks granted 22,448 mortgages last month, down 65 percent from a year earlier.

``There seems to be no easing in the pace of decline'' in the housing market, said Walker. ``We're forecasting a recession this year, things are going to get tougher.''

The pound has weakened as prospects for the economy deteriorate. The currency, which touched a 26-year high of $2.1162 in November, has dropped 7 percent against the dollar this month and traded at $1.8335 today.

The Bank of England has refrained from cutting rates since April as it struggles to curb inflation, which King forecasts will reach 5 percent in coming months, while averting a recession at the same time. As evidence of slowing growth mounts, economists predict their dilemma will get easier.

Societe Generale economists Brian Hilliard and Bijal Shah on Aug. 26 forecast policy makers may cut rates as soon as November as the economy is ``weakening rapidly and inflation is likely to peak in October, before collapsing in 2009.''

They forecast the bank will cut its benchmark to 3.5 percent by ``late summer'' next year, which would match the lowest since the 1950s. The next interest-rate decision is on Sept. 4

To contact the reporter on this story: Svenja O'Donnell in London at sodonnell@bloomberg.net.