U.K. July House Prices Drop as Loan Squeeze Locks Out Buyers

By Jennifer Ryan

Aug. 12 (Bloomberg) -- U.K. house prices fell in July as the squeeze on credit locked out buyers and brought the property market to a ``virtual standstill,'' the Royal Institution of Chartered Surveyors said.

The number of real-estate agents and surveyors saying prices dropped exceeded those reporting gains by 83.9 percentage points, the group said today in London. The reading was 94.7 percentage points in April, the most since the series began in 1978.

U.K. banks approved the fewest mortgages since at least 1999 in June and data yesterday showed that they haven't passed on most of the Bank of England's interest-rate cuts since December. The housing-market slump risks pushing the country into a recession that policy makers can do little to prevent as they combat inflation, which probably reached an 11-year high in July.

``The lack of mortgage finance has brought the housing market to a virtual standstill, with first-time buyers rapidly becoming an endangered species,'' Ian Perry, a spokesman for RICS, said in a statement.

All 11 regions tracked by RICS showed negative price balances on the month, led by the West Midlands, with a reading of minus 93. In London, the balance of prices measured was at minus 72, compared with minus 78 in June.

House prices fell the most in at least a quarter-century from a year earlier in July, according to HBOS Plc. Banks have curbed lending as they nurse losses and writedowns from the U.S. subprime mortgage market collapse totaling almost $500 billion worldwide.

Price `Fear'

``Falling prices and the fear of further reductions yet to come have caused both buyers and the lending institutions to withdraw from the arena,'' RICS cited Andrew Grant, a real-estate agent in Worcester in the West Midlands, as saying.

The average cost of a loan fixed for 24 months with a 25 percent deposit was 6.36 percent last month, down from an eight- year high of 6.6 percent in June, the central bank said yesterday. The bank kept its main interest rate unchanged for a fourth month at 5 percent last week after three cuts since December.

The squeeze on credit has also prompted consumers to spend less. Sales in U.K. shops open at least a year fell an annual 0.9 percent in July, the British Retail Consortium, which represents 80 percent of stores, said in a separate report. Clothing, footwear, furniture and household goods led the decline.

Accelerating inflation has still prevented the Bank of England from cutting interest rates to stave off a recession. Consumer prices probably rose 4.2 percent in July, more than double the Bank of England's 2 percent target, the median forecast of 38 economists in a Bloomberg News survey shows.

The Office for National Statistics will release the inflation data at 9:30 a.m. today in London and the central bank will publish new quarterly economic forecasts tomorrow.

To contact the reporter on this story: Jennifer Ryan in London at Jryan13@bloomberg.net