House prices go into reverse as rate rises take their toll

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House prices posted their first monthly drop in three years in October, Nationwide said yesterday. But the building society went on to say it felt a sustained period of falling prices seemed unlikely while the jobs market remained strong.

House prices posted their first monthly drop in three years in October, Nationwide said yesterday. But the building society went on to say it felt a sustained period of falling prices seemed unlikely while the jobs market remained strong.

The price of an average house slid 0.4 per cent from September to £152,159. Annual growth slowed sharply to 15.3 per cent from 17.8 per cent. Nationwide said weak growth in take-home pay, rising interest rates and stretched affordability were acting as a drag on the housing market. There is also less demand from buy-to-let investors, perhaps discouraged by low rental yields and the prospect of limited future capital growth.

Alex Bannister, a Nationwide economist, said: "Over the coming years house prices are more likely to grow at a very subdued rate rather than fall sharply. This does not mean that prices will not fall in isolated months."

He pointed out that there have been seven monthly declines since the start of 1999, a period which saw house prices more than double. If interest rates peaked at close to 5 per cent, as analysts expect, they would continue to underpin the market, he said.

All the signs are that the once-booming housing market is cooling, after the Bank of England notched up interest rates five times since last November, by a total of 125 basis points to 4.75 per cent.

The Bank releases figures today on mortgage lending and approvals for September. If house prices remain static from now on, they would end the year up 12 per cent from last year, Nationwide said.

The National Institute of Economic and Social Research predicted house-price inflation of 10 per cent this year, slowing to 4 per cent next year, but refused to rule out the possibility of a housing crash.

Its director Martin Weale said: "There is a high risk. I wouldn't bet my money on there not being a 20, 30, 40 per cent fall over the next few years."

The institute estimates that house prices are about 30 per cent overvalued. In its quarterly forecasts, out today, it also predicted the UK economy would grow 3.2 per cent this year and 2.8 per cent next year. That compares with Gordon Brown's forecasts of 3 to 3.5 per cent growth in each year. The NIESR also predicted inflation of 1.4 per cent this year, picking up to the Bank's target of 2 per cent in 2005 as higher wages, a weaker pound and rising oil prices feed through.

A separate survey showed consumer confidence brightened slightly this month after hitting its lowest level in more than a year in September. GfK Martin Hamblin, the market research group, said its monthly confidence measure edged up to minus 6 in October from minus 7, as consumers grew more optimistic about the outlook for their own finances over the next 12 months. That coincides with a growing view that interest rates are close to their peak and will not rise again this year.

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