U.K. Nationwide House Prices Drop Most Since 1990

By Svenja O'Donnell

Aug. 28 (Bloomberg) -- U.K. house prices declined at the fastest annual pace in almost two decades in August after lower mortgage lending and the prospect of a recession discouraged home buyers, Nationwide Building Society said.

The average value of a home plunged 10.5 percent to 164,654 pounds ($301,500), the biggest drop since the final quarter of 1990, Britain's fourth-biggest mortgage lender said today. Prices fell 1.9 percent from July, the 10th monthly decline.

The fastest inflation in more than a decade, a stagnant economy and the rationing of mortgages by banks have sparked the worst property slump since the last recession in the early 1990s. That's prompting economists at banks including Societe Generale SA and Bank of America Corp. to forecast policy makers will be forced to set aside inflation concerns and cut interest rates this year.

``Confidence in the housing market has been evaporating,'' said Fionnuala Earley, chief economist at Nationwide, in a television interview. ``You'd expect that given the amount of economic gloom we're seeing.''

U.K. government bonds rose. The yield on the two-year gilt, which is more sensitive to rate expectations, dropped 4 basis points to 4.46 percent at 10:31 a.m. in London.

This month's annual price decline was also the first double- digit percentage drop since 1990. The U.K.'s economy ground to a halt in the second quarter, ending the nation's longest stretch of growth in a century after tighter credit deterred spending and investment.

Losing Value

``If prices continue to fall at the pace they have done over the past three months, then they will end the year down 15 percent,'' said George Buckley, an economist at Deutsche Bank AG in London, in an e-mailed note. ``With inflation running at 5 percent, this means that residential real estate will have lost around a fifth of its value in real terms during 2008.''

Today's report echoes others showing the housing market is worsening. Mortgage lender HBOS Plc said Aug. 7 that residential prices fell an annual 10.9 percent in July, the biggest decline reported so far in the current downturn. Taylor Wimpey Plc, the country's largest homebuilder, yesterday reported a first-half loss of 1.42 billion pounds after writing down the value of land and expects no improvement in the market ``in the short term.''

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.

Rate Cuts

Policy makers are so far showing little inclination to help the housing market with rate cuts. The Bank of England has kept its benchmark at 5 percent since April as officials weigh the risks of faster inflation with those of economic contraction.

The Bank of England forecasts that inflation, which accelerated to 4.4 percent in July, will peak at 5 percent. That's more than double its 2 percent target.

Still, the pound has declined as prospects for the U.K. economy worsen and investors speculate the Bank of England wil be forced to cut rates. Economists at Societe Generale, Tullett Prebon and Bank of America see the benchmark rate dropping to 3.5 percent next year.

The pound, which touched a 26-year high of $2.1162 in November, has dropped 7 percent against the dollar this month and traded at $1.8375 today.

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