Bank feels rates pressure as house prices hit fresh low

House prices fell at a record pace in 2008 and mortgage approvals have dropped to a new low with further strain on the property market to come this year.

Property values dropped 16.2 per cent in the final quarter of 2008 from a year earlier, the Halifax reported – the biggest fall since its records began in 1983. The fall took the average house price to £159,896 and wiped out more than four years of gains. Britain's biggest mortgage lender has refused to make its usual prediction for prices this year because the market is in such turmoil.

Martin Ellis, chief economist at the Halifax, predicted "further downward pressure" in the coming months because of squeezed incomes and a lack of mortgage finance.

The grim news on prices came alongside worse-than-expected figures for mortgage approvals, which dropped to a fresh low in November of 27,000, from 31,000 a month before. The numbers were well adrift of the expected 32,000 and were the lowest since the Bank of England started collecting data in 1999.

The figures prompted the Conservative leader David Cameron to call for a "more ethical capitalism". Speaking to Jeremy Vine on BBC Radio 2, Mr Cameron said new figures on spending and house prices showed Gordon Brown's efforts to revive the economy with bank recapitalisation, a stamp duty holiday and a temporary cut in VAT had "failed". He added: "Business is not just about making money. It is also about acting in an ethical way. We need to build a more ethical capitalism in Britain as we come out of this dreadful recession."

Hetal Mehta, senior economic adviser to the Ernst & Young Item Club, said: "The volume of [mortgage] approvals is a good leading indicator for the housing market, and today's exceptionally weak reading suggests there is still much trouble ahead for the housing market."

The state of the property market will put pressure on the Bank of England to make a big cut in interest rates on Thursday after reducing rates by three points to 2 per cent since September. The Bank's credit conditions survey, released yesterday, showed secured lending to households falling faster than expected as slumping asset prices made banks wary of lending on property.

Concerns were raised yesterday that lenders could avoid passing on interest rate cuts to mortgage borrowers. Nationwide, the country's biggest building society, said it would not cut borrowing costs for customers on tracker mortgages. The society had reduced tracker rates in line with the Bank of England rate in December, although the move took rates below its "floor" of 2.75 per cent. But it said it would not do so if borrowing costs were cut again.

"Now is the time to protect our savers, so inevitably if interest rates do fall below 2 per cent, we will enforce the floor," Nationwide said. Savers have lost out as banks and building societies have cut rates. Many mortgage borrowers have found themselves better off by hundreds of pounds a month and are paying rates as low as 1.7 per cent for an Alliance & Leicester tracker.

Louise Cuming, head of mortgages at moneysupermarket.com, said other lenders were likely to follow Nationwide's lead despite government pressure to lower mortgage rates in line with the base rate. "This demonstrates the chasm between government rhetoric calling for lenders to pass on rate cuts and financial reality," she said. "We need financial stability and that starts with profitability."

Compare the best mortgages at Independent Compare