House prices fall again as interest rates take effect

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The housing market has peaked, according to Britain's biggest mortgage lender, which reported yesterday that the price of the average home fell by £365 last month.

The housing market has peaked, according to Britain's biggest mortgage lender, which reported yesterday that the price of the average home fell by £365 last month.

Halifax said that prices fell by 0.4 per cent from April, reducing the average cost of a home to £84,290. That took the total loss in value so far this year to more than £1,000. It is the third fall in the past four months and means houses are worth 11.2 per cent more than a year ago, compared with a peak in annual inflation of 16 per cent in January.

Halifax described the slowdown as a "partial correction" from peaks seen at the turn of the year. It provides further evidence that recent hikes in the cost of borrowing ordered by the Bank of England have started to hit homebuyers' pockets.

"House price movements over the past few months indicate that the underlying pace of price growth is slowing, and that the peak in the market has passed," said Halifax "The slowdown appears to be largely in response to the four mortgage rate rises since last September and the abolition of mortgage interest tax relief in April."

Halifax said those two measures together added £750 to the annual mortgage bill for a household with a £60,000interest-only loan.

Martin Ellis, the bank's chief economist, said annual house price inflation would stabilise at 12 per cent this year, before falling back to 7 per cent next year and 3 per cent by 2002 - close to the likely rate of high-street price rises. "The economy will start slowing down next year and we may well see increases in unemployment, which would have an impact on confidence."

Yesterday's figures are a rapid shift from the first three months of the year, which saw prices surge almost 17 per cent year-on-year, according to the Land Registry. This was driven by a 28 per cent surge in London, while some areas of the capital saw even more marked rises. Homes in the borough of Kensington and Chelsea rocketed 58 per cent, including a 138 per cent leap in the average price of a detached home, which now costs £1.16m.

The Royal Institution of Chartered Surveyors, which reported a sharp slowdown in April, said the correction was led by London and the South-east. Milan Khatri, its chief economist, said: "Prices have risen so sharply that it is getting more and more difficult for first-time buyers to even enter the market."

Andrew Weir, manager of the Kensington and Chelsea branch of the Foxton's estate agency, said: "Things are cooling down. Properties that would sell in a day now take three or four weeks, and we have seen a few price reductions for the first time in two years. But people should not be shocked into the idea that prices are collapsing. The housing market in London is driven by unemployment and in central London that's zero, with people coming into the area for work and no room to build new houses."

David Webster, Bradford & Bingley estate agents' regional director for the North-west, said price increases were slowing. "But there is limited evidence that the North-west ever enjoyed the substantial growth of the South," he said.

The fall in the Halifax survey ties in with a 0.4 per cent monthly drop in the Nationwide's index. It also tallies with a marked slowdown in the amount of money being lent by banks and building societies and the number of new mortgage approvals.

Homeowners worried about a cooling market can take comfort from the fact that the slowdown should help to prevent another immediate rate increase. The Bank of England's monetary policy committee is expected to leave the base rate on hold at 6 per cent at the end of its monthly meeting today.