UK and London Property Prices Fall

April 30 (Bloomberg) — U.K. house prices fell in April from a year earlier, the first annual decline since 1996, after the credit squeeze dried up finance for property purchases, Nationwide Building Society said.

The price of an average home dropped 1 percent to 178,555 pounds ($352,000), said Britain’s fourth-biggest mortgage lender. Its index is one of the measures used by the Bank of England when assessing the housing market. From March, prices fell 1.1 percent, double the pace economists had forecast.

Mortgage lenders approved the fewest new loans since at least 1999 last month after turmoil in credit markets prompted banks to tighten standards for borrowers. While the Bank of England has cut interest rates to stave off a recession, policy maker David Blanchflower said house prices may fall by a third, and a separate report today showed consumer confidence fell to the lowest since 1992.

“We’ve been expecting some moderate fall in house prices this year, and that’s only to be expected since we’re seeing deteriorating affordability and tighter credit market conditions,” Nationwide Chief Economist Fionnuala Earley said in a Bloomberg Television interview. She forecasts that prices may decline as much as 5 percent this year.

Market Reaction

The pound, which fell 0.3 percent to 79.47 pence per euro immediately after the report, later erased those declines and was at 78.56 pence at 5:24 p.m. in London. Against the dollar, the British currency rose more than a penny to $1.983.

Chief Secretary to the Treasury Yvette Cooper said house prices will remain under pressure even if the economy continues to grow. She pledged more work to restart mortgage markets.

“No matter how strong the long term fundamentals, the housing market will face pressures while the credit squeeze continues,” Cooper said in a speech in London today.

Blanchflower late yesterday urged his colleagues on the Monetary Policy Committee to take “aggressive action” on rates.

“Monetary policy, in my view, still remains restrictive currently, and we need to take action to loosen policy sooner rather than later,” said Blanchflower in Edinburgh. The nine- member MPC next decides on rates on May 8.

Britain’s central bank this month cut its benchmark rate by a quarter point to 5 percent, the third reduction since December. That’s still the highest among the Group of Seven nations.

Further Evidence

Nationwide’s report is the latest to suggest a downturn in the U.K. housing market is worsening. HBOS Plc, the country’s largest mortgage lender, said this month that prices fell in March by the most since 1992. The Bank of England, which was forced to bail out mortgage lender Northern Rock Plc last year, said yesterday that home-loan approvals dropped to 64,000 last month, the lowest since records began in 1999.

“If someone needs to sell they can still sell, it’s just that they’ll have to take on board a price reduction,” said Stephen Ludlow, director of real-estate agent LudlowThompson, which has 10 branches across London. “The price reduction could be somewhere round about five percent, maybe as much as 10 percent.”

Property-related stocks have plunged since credit markets seized up in August. Bradford & Bingley Plc, the U.K.’s biggest lender to landlords, has dropped 60 percent; shares of HBOS and Persimmon Plc, the U.K.’s largest homebuilder by market value, have both dropped around 50 percent.

Boom Finishes

The end of Britain’s decade-long property boom may hurt consumer spending and drag down economic growth this year. The economy expanded at its slowest pace in three years in the first quarter, and GfK NOP Ltd. said today that consumer confidence fell to the lowest in 16 years in April after the property slowdown and higher oil prices dented households’ spending power.

“There are quite a lot of strong headwinds against consumer spending,” said Jeavon Lolay, an economist at Lloyds TSB Group Plc in London. “We’ve seen the best economic growth already for the year in the first quarter, and it will weaken from here.”

Nigel Lawson, who served as finance minister from 1983 to 1989, said on April 9 that Britain is headed for a “prolonged” recession. Chancellor of the Exchequer Alistair Darling forecasts growth of at least 1.75 percent this year, down from 3 percent in 2007.

The global credit squeeze, which is almost nine months old, is putting further pressure on the housing market. The Bank of England on April 21 offered to swap government bonds for mortgage-backed securities. Darling is encouraging lenders to offer more generous mortgage deals to consumers.

The swap “should introduce some more stability and reduce volatility in the financial markets,” Earley said. “In terms of turning the housing market around and returning to positive rates of growth in next few months, that’s very unlikely.”

To contact the reporter on this story: John Fraher in London at jfraher@bloomberg.net

Sub Prime Effect in UK Property

The extent of sub-prime lending in Britain could be a lot worse than is commonly assumed because a large number of homeowners have more than one loan secured on their property, according to the property research group UKValuation.

As a result, true loan-to-value (LTV) ratios are often higher than is usually thought, which, in turn, could lead to a big jump in mortgage defaults this year, says Mark Witherspoon, the company’s chief executive. The problem is, he says, that many lenders price the risk of lending on a property in ignorance of other charges that may be on it. So if a bank lends 75% of a property’s value, the homeowner may then take additional secured loans with other lenders and therefore face a true LTV of, say, 110%, making him or her much more likely to default.

“The loan will behave like a 110% loan because the borrower knows his true level of debt. He will read about slowing house prices and is much more likely to default on the mortgage payments than Mr 75%,” said Witherspoon, a former head of the property research firm Hometrack. “Until all lenders start to record 2nd, 3rd and 4th charges properly, this will be a major hidden risk in the UK mortgage market.”

UKValuation has been commissioned by a group of mortgage lenders to try to establish the “true” LTVs on the properties they have lent against in recent years.

Particularly vulnerable, says Witherspoon, could be people who have bought flats on a high LTV in the past couple of years. Flat prices have performed much less strongly than, for example, detached houses and are now falling.

Some economists and the International Monetary Fund believe that British house prices are overvalued by as much as 30% and could fall sharply

London Properties Drop in Price

 

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