House prices post record fall

By Sumeet Desai

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

But central bank policymakers look unable to offer any succour as inflation is already running a full point above the central bank's target and is set to climb further.

Retailers raised prices at their sharpest rate in more than a quarter of a century in May and more increases are expected over the summer, according to a Confederation of British Industry survey out on Thursday.

"The Monetary Policy Committee already has warned that an extended period of sub-trend growth probably is needed to bring inflation back to target over time," said Michael Saunders, economist at Citigroup.

"It now looks as if the economy will undershoot their expectations but, with rising inflation and rising inflation expectations, the MPC will still not be able to ease quickly. Very tough times lie ahead for the economy."

The monthly decline in house prices, the largest since the Nationwide survey started in 1991, wiped 5,000 pounds off 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."