Aug. 7 (Bloomberg) — U.K. house prices declined the most in at least a quarter century in July as banks starved the housing market of credit and pessimism about the economy increased, an HBOS Plc report showed.

The average cost of a home fell 8.8 percent to 177,351 pounds ($345,825) from a year earlier, the steepest drop since the survey began in 1983, Britain’s biggest mortgage lender said in a statement today. Prices fell 1.7 percent from June.

The worst housing-market slump in more than two decades is deepening as rising fuel, food and credit costs erode living standards, raising the prospect of the first U.K. recession since 1991. Bank of England policy makers will probably keep the benchmark interest rate at 5 percent today as they try to tame the fastest inflation in 11 years.

“Pressure on householders’ income, together with a very significant reduction in mortgage finance due to the global financial markets crisis, is constraining potential house buyers’ ability to enter the market,” Suren Thiru, an economist at HBOS, said in the statement. “This is resulting in both lower prices and activity levels.”

Home values last month fell to the level they were at in June 2006, HBOS said.

Banks have curtailed credit as the collapse of the U.S. subprime mortgage market pushed writedowns and credit losses above $493 billion. U.K. lenders approved 36,000 loans for house purchase in June, the least since comparable data began nine years ago.

Falling Confidence

U.K. consumer confidence fell the most in at least four years in July as property values fell, unemployment rose and living costs soared, Nationwide Building Society said yesterday. The British economy grew 0.1 percent in the quarter through July, the slowest pace in three years, the National Institute of Economic & Social Research said.

Prime Minister Gordon Brown is considering ways to revive the market for residential property to shore up his dwindling popularity. A survey by BPIX Ltd. showed 47 percent of respondents backing the Conservative opposition compared with 24 percent for the ruling Labour Party. BPIX surveyed 2,194 adults from July 31 to Aug. 2.

Chancellor of the Exchequer Alistair Darling, in an Aug. 5 interview on BBC Radio 4, left open the possibility of a temporary suspension of a tax on house sales to boost the housing market. The government charges homebuyers a levy of between 1 percent and 4 percent, depending on the value.

Squeeze on Incomes

Britons’ incomes are getting squeezed by the fastest price gains since at least 1997. Consumer-price inflation reached 3.8 percent in June, almost double the government 2 percent target, as oil and food costs soared.

Faster inflation has sharpened the dilemma facing central bank policy makers as the economy slows to a crawl. U.K. services from banks to airlines contracted in July, according to a survey of about 700 companies, and factory production unexpectedly dropped for a fourth month in June, reports on Aug. 5 showed.

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