April 8, 2008 / 7:35 AM / 12 years ago

Shock house price drop deepens gloom

LONDON (Reuters) - House prices fell in March at their sharpest pace since the recession of the early 1990s, the country’s largest mortgage lender says, raising expectations that interest rates will be cut this week.

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

The surprisingly severe drop reinforced opinions that the housing market faces a bleak year as mortgage lenders grow more cautious and the credit crunch feeds through to households.

It is also another blow for Prime Minister Gordon Brown before regional and London mayoral elections as his reputation as a safe pair of hands on the economy fades.

House prices fell 2.5 percent during last month, the Halifax said, more than six times as much as analysts had forecast and the largest monthly decline since September 1992.

The annual three-month rate of house price inflation stood at 1.1 percent. Six months ago, that rate was in double figures.

“The stunningly large drop in house prices in March is the second largest in the history of the Halifax index, beaten only by the fall recorded in 1992 when the housing market was in the grips of a full-blown crash,” said Seema Shah, a property economist at researchers Capital Economics.

“There is a clear risk that this housing market correction will be sharper and deeper than we currently expect.”

The pound fell and interest rate futures rose as the figures reinforced expectations that the Bank of England will cut interest rates by 25 basis points to 5.0 percent on Thursday to shore up the economy despite simmering inflationary pressures.

“The overall impression is that house prices were buckling markedly even before the latest escalation of the credit crunch,” said Howard Archer, an economist at Global Insight. “The increasing danger of a sharp housing market correction heightens pressure on the Bank of England to cut interest rates.”

CREDIT CRUNCH

Most economists expect house prices to fall this year as the credit crunch bites into the real economy. All the major lenders have withdrawn mortgages covering 100 percent of a property’s purchase price as they grow more cautious and tighten up their terms.

But Halifax said the price decline may be only slight due to strong economic fundamentals. “We expect there to be a modest fall in UK house prices this year,” said Martin Ellis, chief economist at Halifax.

However, such a big fall in the value of British homes in one month won’t brighten the public mood as fears grow of a global economic downturn and a recession in the United States.

With regional and London mayoral elections on May 1 and the Labour Party falling behind the Conservatives in opinion polls, Brown is unlikely to be able to rely on his economic reputation to woo voters.

Brown’s leadership rating is at its lowest yet and a third of voters think he is worse than his predecessor Tony Blair, according to a Populus poll for The Times.

“The striking feature of the poll is the public’s pessimism about the outlook for the economy and the current state of Britain,” political commentator Peter Riddell wrote in The Times. “It is very hard to see this getting any better for Brown over the next year or so. (His) only hope is that the economic downturn will not be too severe or too long.”

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