Weak economy could worsen property slump

LONDON (Reuters) - A weaker economy could worsen the commercial property slump in 2008 as the stock of unrented space rises, the financial watchdog warned on Tuesday.

More than a million households on fixed rate mortgages could also face much higher mortgage bills, the Financial Services Authority (FSA) said.

In its annual Financial Risk Outlook, the FSA warned of a vicious spiral as reduced access to funds exacerbated falls in property capital values, a slower economy weighed on rents, falling house prices reduced consumer spending and construction, and growing debt difficulties made banks less willing to lend.

It said the effects of a cumulative 1-1/4 percentage point increase in borrowing costs between August 2006 and December 2007 had yet to feed through to the economy and that higher wholesale lending rates and a reassessment of credit risk by lenders could make things worse, despite the Bank of England's decision in December to cut its rates for the first time in over two years.

The FSA said commercial property prices were likely to fall further after capital values peaked in July, falling by 11.7 percent over the rest of 2007, and that property funds could impose more restrictions on withdrawals by investors or be forced to sell properties to maintain liquidity.

"A fall in commercial property prices could mean that finance for property developments or securitisation deals become more difficult to source and more expensive," the report said.

The fall in lending could in turn exacerbate the effects of a weak property market, it said, warning that financial firms with high concentrations in residential and commercial property lending could face losses which require an increase in provisions on both the books, thus reducing profitability.

The FSA also said about 1.4 million fixed-rate mortgages will come to the end of their fixed-rate term in the next 12 months, which could add an average 210 pounds to their monthly bill if borrowers reverted to their lender's standard variable rate.

(Editing by David Cowell)

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