House price slide puts rates on hold

Halifax says price of average home fell 1.1 per cent last month. Bank not expected to act until next year
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The Independent Online

The Bank of England left interest rates on hold yesterday just hours after new figures showed the housing market suffered its sharpest fall for almost a decade last month.

The Bank of England left interest rates on hold yesterday just hours after new figures showed the housing market suffered its sharpest fall for almost a decade last month.

The decision was greeted with relief by business organisations and the housing industry, which had warned another rate rise would trigger a catastrophic slump in prices.

Yesterday's decision was widely expected in the wake of a raft of data showing a fall in house prices and mortgage borrowing, a slump in manufacturing and a slowdown in overall economic growth. But there was division in the City over whether the Bank would need to raise rates again next year to quell inflationary pressures.

There was further evidence the housing market was faltering from Halifax, the country's biggest mortgage lender, which said the average house price fell by 1.1 per cent last month.

This was the biggest drop since 2000, and taken together with the 0.4 per cent fall in the Nationwide building society's figures represented the largest decline since 1995.

"If there was any lingering flirtation with a need to raise rates at today's Monetary Policy Committee meeting, this should have been enough to kill it," Malcolm Barr, UK economist at JP Morgan, said.

Halifax said the typical selling price of a home dropped by £1,800 in October - a fall of £60 a day. Martin Ellis, its chief economist, said: "The Bank's rate hikes have taken impetus away from housing demand."

The mortgage lender said there were also "tentative signs" that pressures on first-time buyers were easing, with figures suggesting the ratio of house prices to earnings had peaked.

Analysts said that with house prices falling, inflation languishing at 1.1 per cent and economic growth halving between the second and third quarters of the year, the Bank had little choice but to sit on its hands. The Bank usually avoids raising rates in January or December, meaning consumers and business should be spared another rise in borrowing costs for at least three months.

Ian McCafferty, the chief economic adviser to the CBI, said the Bank had been right to do nothing. "Quite how well the economy performs into next year is highly uncertain, so the MPC should keep rates on hold until the outlook becomes clearer," he said.

The Institute of Directors was more hawkish, saying there was "still room" for one quarter-point rate rise. Graeme Leach, its chief economist, said: "The MPC has gone into hibernation but it's very likely to wake up with a growl in the new year."

The Bank publishes its latest inflation and growth forecasts next week. Several analysts expect them to point to the need for further rate rises.

Michael Saunders, an economist at Citigroup, said that based on market interest rates the Bank would forecast inflation breaking through the 2.0 per cent target two years ahead. "Such a forecast would imply the MPC expects to hike rates at some stage in the next quarter or two if events play out in line with their forecast," he said. But others said the fall in mortgage approvals pointed to further drops in house prices that could curb consumer spending.

Consumer confidence in house prices fell to its lowest level in four years last month. Just 45 per cent of homeowners believed their property would continue to increase in value, down from 52 per cent in September, the Woolwich Consumer Confidence Index showed. There was contrary news from the labour market, where the number of people placed in permanent jobs by recruitment consultancies rose for the 17th month in October. Meanwhile, pay rates for temporary and contract staff rose to its highest level in more than six years, NTC Research said.

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