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British home prices fall for a third month in November

Average cost of a home declines 1.1% to £194,895 from a month earlier

(LONDON) UK house prices fell for a third month in November, the worst performance in more than a decade, and consumer confidence slumped – signs that rising credit costs are hobbling growth in Europe’s second-largest economy.

The average cost of a home in Britain declined 1.1 per cent to £194,895 (S$581,820) from a month earlier, after a 0.7 per cent drop in October, a report by HBOS plc said yesterday.

Prices last fell for three months in a row in 1995. Consumer optimism declined the most in at least three years, Nationwide Building Society said.

‘It’s looking pretty grotty out there,’ said Geoffrey Dicks, chief UK economist at Royal Bank of Scotland Group Plc in London. ‘This is yet another indicator that the economy has taken a sharp turn for the worse.’

The pound dropped after the reports, which came a day before the Bank of England’s interest rate decision. While policymakers said that they are still concerned about inflation, the Financial Services Authority said on Tuesday that credit markets may deteriorate next year and banks including Merrill Lynch & Co forecast that the central bank will be forced to cut rates today.

The pound fell as much as 0.9 per cent against the US dollar to touch a two-week low, and traded at US$2.0407 as at 9.01 am here.

House prices rose 6.3 per cent in the quarter through November from a year earlier, HBOS said.

The Bank of England is watching for signs that tighter credit conditions are cooling economic growth as consumers brace for the property market’s worst year in more than a decade. House prices may fall 10 per cent next year, Morgan Stanley forecasts.

While 44 of 61 economists still expect the central bank to keep its main rate at a six-year high of 5.75 per cent today, the rest forecast a cut of 25 basis points, the biggest split since June 2004.

‘There are clearer signs that the slowdown in the housing market is gathering pace,’ Bank of England deputy governor Rachel Lomax said on Nov 23. The bank ‘faces a tricky period’.

Nationwide Building Society said yesterday that its consumer confidence index fell 12 points to 86, the biggest drop since the index was introduced in May 2004, as faster inflation hurts households’ purchasing power. A measure showing willingness to spend fell 14 points to 63, the lowest recorded.

‘Uncertainty about the effects of the credit crunch, together with rising oil and food prices, seem to be affecting feelings about jobs and the future economic situation,’ said Fionnuala Earley, chief economist at Nationwide. ‘It is natural that consumers would think about tightening their belts.’

A decade-long boom in house prices has helped fuel the country’s longest stretch of growth since World War II.

Credit costs have risen after losses from the collapse of the US sub-prime mortgage market caused lending between banks to seize up. Three-month Libor rates, a measure of the cost of borrowing for banks, climbed to 6.65 per cent on Tuesday, the most since Sept 18.

British banks have raised the average rate on a mortgage for 95 per cent of the price of a property, fixed for 24 months, to 6.37 per cent in October from 6.32 per cent the previous month, according to the central bank’s website.

‘There is a very real prospect that conditions will worsen further into next year, in terms of both liquidity and credit risks,’ Clive Briault, an official at the Financial Services Authority, said on Tuesday.

Bank of England governor Mervyn King said on Nov 29 that tighter credit conditions may curb household demand.

‘With borrowing more expensive, and less easily available,’ he said, there may be ‘slower growth of consumer spending’.

Slowing growth is already hurting sales at UK stores. Moss Bros Group plc, Britain’s third-largest suit retailer, said yesterday that full-year profit probably won’t meet analysts’ estimates.

 

Source: Bloomberg (Business Times 6 Dec 07)

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