House prices post record fall

A row of estate agents' ''for sale'' signs are seen on a street in South London April 3, 2008.

LONDON (Reuters) - House prices fell a record 2.5 percent in May, the Nationwide Building Society says, raising fears the property market downturn could soon turn into a crash that hits the whole economy.

The monthly decline, the largest since the lender started compiling records in 1991, wiped 5,000 pounds off the value of the average home and took prices 4.4 percent lower than a year ago -- the sharpest rate since the 1992 economic slump.

"The sheer size of the drop in house prices, without the economy having yet slowed significantly, suggests that this housing market correction will be deep and prolonged," said Seema Shah of Capital Economics.

"All this is with the support of a still relatively healthy labour market. Imagine then, what will happen to house prices once the economic downturn gathers pace and unemployment rises."

Prices have now fallen for seven months running -- the longest stretch of falls in 26 years when the last housing market crash plunged millions of Britons into negative equity, or owing more on their mortgage than the value of their home.

For now, Nationwide is predicting that prices will fall by less than 10 percent this year, which would still keep the vast bulk of Britons recording paper profits on their homes which have trebled in value over the last 10 years.

The Bank of England has not signalled too much concern over the house price falls as it has always contended some slowdown was needed after years of double-digit inflation.

Governor Mervyn King has also said the economy is actually doing quite well, outside the property and financial sectors.

But many experts say prices could tumble a lot more as a global credit crunch is making it harder for people to get new mortgages from cash-strapped lenders.

"It now looks more likely than not that house prices will suffer double-digit falls both this year and in 2009," said Howard Archer, economist at Global Insight.

MORE BAD NEWS FOR BROWN

That could prove toxic for embattled Prime Minister Gordon Brown who is banking on an economic recovery to revive his sagging political fortunes ahead of a general election that must take place by May 2010.

Two-thirds of British households own their homes, making prices an extremely emotive issue up and down the country. Falling prices have already battered consumer morale and confidence in the government's handling of the economy.

"Correlation between house prices and consumer spending in the UK is high, and indeed it is the highest among major industrial countries," said Michael Saunders, economist at Citigroup.

"Consumer confidence already has plunged and surveys suggest retail sales growth is weakening very sharply. Worse lies ahead as the lagged effects of housing come through, as well as the erosion of real incomes from rising inflation and mounting job losses."

The Bank of England has cut interest rates three times since December but further reductions may now be some way off as the inflation is running a full point above the central bank's target and expected to go even higer.

Housing demand could therefore suffer more in the coming weeks as the cost of fixed-rate mortgages shoots up in line with reduced expectations of further interest rate cuts.

Two-year swap rates, on which fixed-rate mortgage products are priced, have risen by nearly a full-point since mid-April.

"With two lenders reportedly raising their fixed mortgage rates again today and the MPC unlikely to cut rates in the very near term, the news just keeps getting worse," Alan Clarke, economist at BNP Paribas."