U.K. Nationwide House Prices Drop Most Since 1991

By Jennifer Ryan

Oct. 30 (Bloomberg) -- U.K. house prices dropped by the most in at least 17 years in October as banks tightened their grip on credit and the prospect of a recession deterred potential buyers, Nationwide Building Society said.

The average cost of a home fell 14.6 percent from a year earlier to 158,872 pounds ($261,000), the largest decline since the survey started in 1991, the Swindon, England-based mortgage lender said in an e-mailed statement today. Prices slid 1.4 percent from September.

One in ten mortgage holders may soon owe more than their homes are worth, Bank of England forecasts show, stretching homeowners as banks curtail lending. With the economy contracting for the first time since the start of the 1990s and unemployment rising, economists say house prices may have further to fall.

``A looming recession and continued financial-market instability have uncomfortable implications for the housing and mortgage markets,'' Fionnuala Earley, chief economist at Nationwide, said in the statement. That ``will undoubtedly affect the pace of recovery in house prices.''

Bank of England policy maker David Blanchflower said yesterday that Britain faces a ``deep and long-lasting'' recession unless rates are cut ``significantly'' soon. While the central bank on Oct. 8 slashed its benchmark rate by 50 basis points to 4.5 percent, Capital Economics Ltd. yesterday forecast it will fall as low as 1 percent.

BOE Remit

Chancellor of the Exchequer Alistair Darling said today that the Bank of England's remit gives it scope to cut interest rates even after consumer-price inflation accelerated to 5.2 percent last month, the fastest in a decade.

The pound climbed for a third day against the dollar today, rising 6.1 percent in the period, to trade at $1.6623 as of 10:45 a.m. in London. The currency is still down more than 16 percent since July.

U.K. policy makers are trying to ease strains in credit markets along with colleagues at the Federal Reserve and other central banks. Consumer borrowing rose at the slowest pace since April 1993 in September and mortgage approvals stayed close to the lowest in at least nine years, Bank of England figures show.

The Fed yesterday cut its benchmark rate by 50 basis points to 1 percent, matching a half-century low.

U.K. house prices are nevertheless likely to fall more and the Bank of England estimates that a 15 percent drop in values would push 10 percent of mortgage-holders into so-called negative equity. Unemployment rose to the highest level in almost two years in September.

``As the economy weakens further, there is likely to be more movement on asking prices as sellers adjust to the prevailing conditions,'' said Earley.

All but three of 30 economists in a Bloomberg News survey forecast the Bank of England will cut its main rate by at least a half point on Nov. 6. The remainder predicts a quarter-point reduction.

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