House prices in UK fall on expensive credit

UK house prices fell for a second month in December, indicating that higher credit costs are snuffing out a decade-long property market boom, Nationwide Building Society said.

Home values dipped 0.5 percent from November to 182,080 pounds (US$364,000), Britain's fourth-largest mortgage lender said yesterday. Last month's 0.8-percent drop was the biggest since June 1995. From a year ago, gains ebbed to 4.8 percent, matching the least in 20 months, from 6.9 percent in October.

Prospective home buyers are being squeezed by a record debt load and more expensive borrowing after house prices tripled in the past 10 years. Bank of England policy makers cut their benchmark rate from a six-year high this month on concerns fallout from a United States housing recession posed a greater threat to the economy than inflation.

"Demand is responding to the pressures of weak affordability, past increases in interest rates and lower house price expectations," Fionnuala Earley, chief economist at Nationwide, said in a report. "Lower interest rates are more likely to stabilize market activity rather than reignite it."

The central bank may lower the key rate by at least half a percentage point next year as economic growth slows, she said. The pace of expansion is easing from the fastest since 2004 after a worldwide surge in credit costs forced banks to write down the value of their assets by at least US$70 billion.

Policy makers will leave the key rate unchanged at their meeting on January 10, according to the median forecast of 38 economists in a Bloomberg News survey.

The collapse of the US sub-prime mortgage market made banks reluctant to lend to one another and drove up market credit costs, pushing up mortgage costs and making homes less affordable. Consumers have taken on 1.4 trillion pounds of debt through home loans and unsecured borrowing such as credit cards.

UK consumer confidence fell to the weakest since 1995, according to GfK NOP Ltd, while Bank of England data show that the average rate offered by lenders on a mortgage for 95 percent of the price of a property, fixed for 24 months, increased to 6.44 percent from 6.42 percent in October.

The threat the market turmoil poses to the UK economy prompted the Bank of England to lower borrowing costs for the first time in two years on December 6.

Policy makers said they saw room to "act preemptively" by cutting the key rate a quarter-point to 5.5 percent, which they said would not sidetrack their goal to keep inflation at two percent.

Policy makers were concerned about a "more pronounced than expected" slowdown in the housing market when they made their decision, minutes of the meeting showed. The decision was the first unanimous vote for a rate cut since the aftermath of the September 11 terrorist attacks in 2001.