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British house prices fell for the first time since 2005 in August after five interest-rate increases in the past year discouraged buyers, the Royal Institution of Chartered Surveyors in London said.
The number of real estate agents and surveyors saying prices declined outnumbered those reporting gains by 1.8 percentage points in August. That's the first negative balance since October 2005. Prices in the capital rose at the slowest pace in more than two years.
Britain's decade-long property boom is showing signs of cooling after the Bank of England raised its benchmark rate to a six-year high in July. With the US sub-prime mortgage slump pushing global borrowing costs higher still, pressure on property prices is likely to increase.
"The market will soften further," said Ian Perry, an RICS spokesman. "Potential house buyers are far more cautious as they wait and see what effect interest-rate rises will have on household finances."
Price declines were largest in the West Midlands, the northwest of England and East Anglia. The house price index for London, the engine of the UK property market, fell to the lowest since June 2005.
"The interest rate rises have bitten and their sting is being felt across all but the highest-value properties," said Grant Robertson of Allied Surveyors in Glasgow, Scotland. "Selling times are very slow."
Mortgage defaults in the US have made commercial banks reluctant to lend to each other, pushing up market interest rates around the world. The gap between three-month UK money-market rates and the benchmark central bank rate of 5.75 per cent is the widest in at least two decades.
Banks such as Abbey, the second-largest UK mortgage lender, are passing the higher rates on to their customers. The rate on a mortgage fixed for two years, rose to a seven-year high of 6.58 per cent in August for borrowers with a 5 per cent deposit on their homes, the Bank of England reported this week. That's up from 6.37 per cent at the end of July and 5.38 per cent a year earlier.
HBOS, the UK's biggest mortgage lender, said prices rose for an eighth month in August and gained 11.6 per cent from a year earlier. Rightmove, Britain's biggest real estate website, said London prices dropped for the first time in a year in August.
A shortage of housing may continue to support the market.
Building stagnated at 148,000 new units a year on average between 1989 and 2005, down from a peak of 425,000 in 1968, government figures show.
The UK's economy is on track to expand at the fastest pace in three years in 2007. Growth accelerated in the second quarter, unemployment dropped to a two-year low in August and retail sales increased in July.
Still, higher borrowing costs are increasing the burden on consumers already shouldering a record £1.3 trillion ($3.7 billion) in debt. A gauge of interest from new buyers dropped the most since August 2004, RICS said.
"Affordability is at its most stretched in over a decade, said Perry. "Many will worry that rising mortgage repayments will prove a step too far."
- Bloomberg
