House price slide puts rates on hold

Fears of a crash in the consumer economy rose yesterday after figures showed the largest fall in house prices for a decade and a dramatic slump in the number of people borrowing against the value of their home.

Fears of a crash in the consumer economy rose yesterday after figures showed the largest fall in house prices for a decade and a dramatic slump in the number of people borrowing against the value of their home.

The price of the average home dropped 0.6 per cent last month, the largest fall since June 1995, the Nationwide building society said yesterday. The fall pushed the annual rate of house price inflation down to 7.9 per cent, the first time it has fallen below the key 10 per cent level in almost four years.

Meanwhile, the Bank of England said mortgage equity withdrawal - used for purposes other than buying a home - in the final three months of last year was £6.9bn, half the amount in the previous quarter and the lowest for three years.

Analysts said the falls had made it more likely that interest rates would stay on hold for the foreseeable future and warned it could point to further pain for high street retailers as consumers cut their spending plans.

Alex Bannister, Nationwide's group economist, said: "There seems to be a little more breathing space on the timing of any change in interest rates."

Some members of the Bank's Monetary Policy Committee have highlighted continued weakness in retail sales as a key reason not to raise rates too quickly. Official figures recently showed high street sales volumes in the key December to February period had suffered their worst fall for 28 years.

John Butler, a UK economist at HSBC, said yesterday's figures provided a good explanation for the decline and warned there could be more pain to come. He said there was strong evidence that the strength of retail sales in recent years had been driven by the boom in the housing market.

"The relationship is very strong, which suggests that now we are getting the slowdown in house prices and equity withdrawal drying up, that retail sales growth could decline to zero," he said.

Last year the Bank tried to calm fears of a housing-driven recession, saying the link between housing and consumer spending had broken down.

But Mr Butler said his analysis showed a close link between house prices and retail sales, although not with spending on services. "We don't take equity out of our house to go to the restaurant, we use it buy 'big ticket' items in the shops," he said. "Finance available to households - disposable income and equity withdrawal - has fallen sharply, which probably explains the slowdown in retail sales."

Stephen Lewis, the chief economist at Monument Securities, said: "The Bank's argument that the state of the housing market did not necessarily have a bearing on consumer spending never seemed very plausible. Equity withdrawal is likely to continue to fall away and consumer spending will feel the downward pressure for several quarters to come."

The British Retail Consortium said it had been warning of a consumer slowdown since the autumn. Kevin Hawkins, its director general, said: "The Bank needs to be thinking about cutting rates. Another rise would be disastrous for the high street because the high street, consumer confidence and retail sales are all related."

However, the gloom was offset by a small rebound in mortgage lending and consumer confidence. The Bank said mortgage lending rose by £7.22bn in February after a £7.07bn increase in January.

Meanwhile, an index from the consultancy GfK Martin Hamblin showed consumer confidence rose to +1 in March from zero in February. Analysts had predicted no change. Britons' assessment of their personal finances over the next 12 months improved to +11 in March, compared with +10 in February.

Howard Archer, a UK economist at Global Insight, said: "The survey reinforces our belief that consumer spending will be healthier than many fear over the coming months."

Separately Standard & Poor's, the credit ratings agency, said the UK's recent economic performance had "outshone" that of its peers.