U.K. House-Price Inflation Slows to Lowest in 3 Years (Update5)
Dec. 30 (Bloomberg) -- U.K. house prices fell in December, with annual inflation slowing to the lowest in almost three years as higher borrowing costs end a boom that has tripled home prices since 1995, Nationwide Building Society said.
The average value of a home climbed 12.7 percent from a year earlier to 152,623 pounds ($293,000) after a 15 percent annual increase the previous month, the Swindon, south England-based lender said today. On the month prices slipped 0.2 percent after a revised 0.9 percent gain the previous month, according to Nationwide, the U.K.'s third biggest provider of mortgages.
Bank of England Governor Mervyn King and his committee of policy makers have engineered the slowdown by boosting interest rates five times in the ten months through August. A period of ``modest'' price drops, accompanied by accelerating wage growth will make homes more affordable, the bank said on Nov. 10.
Nationwide's report ``suggests that the housing market slowdown will end in a soft landing,'' said Gavin Redknap, an economist at Standard Chartered Plc. ``It will be enough to end the consumer boom.''
A surge in house prices in the past decade has given consumers access to cheaper borrowing secured on their properties and boosted confidence, helping to sustain the longest period of uninterrupted economic growth since the U.K., Europe's second biggest economy, became an industrialized nation.
First-Time Buyers
House prices have tripled since 1995, while wages have risen by 50 percent, forcing first-time buyers out of the market, Nationwide said. Fewer people bought their first homes in 2004 than in any other year since the mid 1980s, the lender said.
The rate on three-month interest-rate futures contracts rose following the report, as did government bond yields. The rate on the contract due March 2006 climbed to 4.83 percent at 10:55 a.m. in London from 4.81 percent at the close yesterday.
The 5 percent gilt due September 2014 dropped 0.18, or 1.8 pounds per 1,000 pounds ($1,785) face amount, to 103.05 at 10:32 a.m. in London, according to ABN Amro Holding NV. Its yield rose 3 basis points, or 0.03 percentage point, to 4.61 percent.
The central bank has left its benchmark interest rate unchanged at a three-year high of 4.75 percent since August when signs began to emerge of a weakening in house-price growth.
Avoiding a Slump
The housing market is likely to avoid a slump similar to that witnessed at the beginning of the last decade as the Bank of England raises borrowing costs just once more and unemployment remains near a 30-year low, Nationwide predicts. House price- growth slowed to 2.7 percent in the past six months, the lender said after surging 11.8 percent in the first half of the year.
``A sharp downturn in prices cannot be ruled out, but whilst the economic outlook remains positive it looks unlikely,'' said Alex Bannister, group economist at Nationwide. ``We do not foresee a reoccurrence of the sharp increases in interest rates and large scale joblessness that resulted in house price falls in the early nineties.''
An index of consumer confidence in December climbed for a third month to minus 3 from minus 4 in November, according to a survey of 2014 people by Martin Hamblin GfK published today.
Still, the end of the housing boom may contribute to a slowdown in economic growth to about 2.5 percent next year, from 3.2 percent in 2004, the Bank of England said in its quarterly projections published Nov. 10.
``Housing related areas of the economy are in trouble,'' said James Carrick, an economist at ABN Amro NV in London, who predicts dropping prices may knock 1 percentage point off economic growth in 2005. ``We'll see less spending on items such as home improvements and furniture.''
Estate agents including Miles Shipside, commercial director of property Web site Rightmove, say the central bank should reduce its main lending rate from a three-year high of 4.75 percent to revive the housing market. Rightmove says home values dropped 0.3 percent in the four weeks to Dec. 11, the third drop in five months.
Industry Earnings
Countrywide Plc, the U.K.'s biggest estate agent and a joint owner of Rightmove, on Nov. 19 cut its 2004 profit forecast for the second time in eight weeks. George Wimpey Plc, Britain's biggest builder by revenue, on Dec. 22 said U.K. home sales fell in the second half from a year earlier.
An index of house-price changes compiled by the Royal Institution of Chartered Surveyors slid to minus 48, the lowest since 1992, in the three months through November, the estate agents' group said Dec. 21.
Dropping house prices are crimping consumers' willingness to borrow. U.K. banks approved fewer mortgages in November than at any time since records began in December 2001, the British Bankers' Association said yesterday.
London saw the slowest price increases among U.K. regions with values rising 7.6 percent in 2004. The region with the biggest gains was the north west of England.
The London boroughs of Hammersmith and Fulham and Newham led gains in the capital while prices failed to rise in Islington, Ealing and Tower Hamlets, Nationwide said.
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