U.K. Home Prices Drop as Economy Nears `Abyss,' Rightmove Says

By Brian Swint

Oct. 20 (Bloomberg) -- U.K. house prices posted the biggest annual decline in at least six years in October as the British economy stared ``into the abyss,'' Rightmove Plc said.

The average asking price for a home fell 4.9 percent from a year earlier, the most since records began in 2002, to 229,691 pounds ($398,000), Britain's most-used property Web site said today. In London, prices dropped 2 percent from a year ago.

``Certainly from an economic point of view, we've stared into the abyss,'' Miles Shipside, commercial director at Rightmove, said in a Bloomberg Television interview. ``With unemployment growing, we can see a lot of repossessions about to happen. The situation is going to get more severe.''

Britain is in a recession and will contract for the next three quarters, according to a report published today by Ernst & Young's ITEM Club, which uses the same forecasting model as the U.K. Treasury. The financial crisis forced the government to rescue banks and has left a dearth of loans for potential homebuyers.

The government last week announced an unprecedented 37 billion-pound bailout for Royal Bank of Scotland Group Plc, HBOS Plc, and Lloyds TSB Group Plc. Bradford & Bingley Plc was seized last month, and Northern Rock Plc was nationalized earlier this year after the first U.K. bank run in more than century.

The intervention in the banking sector is the biggest since the nationalization wave by the socialist government of Clement Attlee after World War II.

Brown's Rescue

Brown last month suspended the tax on home purchases of less than 175,000 pounds. The government has also promised 250 billion pounds in interbank loan guarantees to unfreeze money markets in response to the crisis that cost banks worldwide more than $600 billion in losses and writedowns.

Asking prices for a home still rose 1 percent from September, led by gains in the East and West Midlands and the Southeast, today's report showed. Price declined the most on the month in Wales and the north. In London, prices increased 0.3 percent on the month.

``For those on the market now, they haven't been dropping their prices particularly,'' Shipside said. ``But they're going to face fairly severe competition from some forced sales from this unfortunately high unemployment that's coming.''

The economy stalled in the second quarter, ending the longest stretch of uninterrupted growth in more than a century. A government report this week will probably show that gross domestic product contracted 0.2 percent in the third quarter, the median forecast of 35 economists in a Bloomberg News survey shows.

U.K. Forecast

The economy will shrink 1 percent next year, the ITEM Club predicted today. It forecast that the Bank of England, which lowered the benchmark interest rate by a half point to 4.5 percent on Oct. 8, will cut it further in coming months.

``The supply of credit to companies and households is likely to remain severely restricted,'' said Peter Spencer, the ITEM Club's chief economist and a former U.K. Treasury official. ``The bank now has room for further cuts as early as next month. We see base rate falling to 3 percent next year.''

Economists including Citigroup Inc.'s Michael Saunders and UBS AG's Amit Kara predict that the Bank of England will follow last week's emergency interest-rate reduction with another half- point cut at the next scheduled meeting on Nov. 6. Minutes of last month's meeting, showing how each of the nine panel members voted, will be published Oct. 22.

To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net.