House prices head for 6% fall

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House prices are heading for a 6 per cent fall in real terms this year, according to the latest data from the country’s biggest mortgage lender.

The Halifax House Price Index, published yesterday, showed a weakening in property values of 0.9 per cent in February, wiping out the 0.8 per cent gain in January. Earlier this week the Nationwide Building Society registered a 0.3 per cent rise in prices last month.

Economists say that the two indices are broadly showing a similar picture of a gently softening market with little activity. However, there are also warnings that any rise in interest rates instigated by the bank of England could have a damaging psychological effect on an already fragile market, pushing prices even further down. While the figures for individual months can be volatile, the Halifax say that house prices in the three months to February were 0.4 per cent lower than in the previous three months, showing “a continuing slight decline in prices”.

While disappointing for home owners the trend is, for the moment, better than the 5 to 6 per cent quarterly slumps in values in the autumn of 2008. Nonetheless, prices in February are 2.8 per cent lower than a year ago, the biggest annual decline since October 2009.

Martin Ellis, Halifax housing economist, said: “Overall, we expect a modest 2 per cent decrease in house prices in 2011”. Given inflation of around 4 per cent this year, that would translate into a real-terms drop in values of 6 per cent.

Howard Archer, chief UK Economist at Global Insight added: “Any early interest rate hike would be bad news for the housing market and likely to weigh down on prices - not just the rate rise itself but also the impact on potential house buyers' psychology resulting from the fact that they would be facing rising interest rates with the prospect of more to come.”

The Bank of England’s Monetary Policy Committee meets ext week to discuss it’s next move; the general consensus is that they will continue to leave rate s on hold until May.

As at various points in the last year or two, a shortage of quality properties coming onto the market may offer some support for prices in the short term. The Royal institution for chartered Surveyors have seen a reduction in new seller instructions for the fourth successive month in January. Yet there has also been a general decrease in new buyer interest as well, partly prated by the continuing shortage of mortgage finance and partly due to sharply depressed consumer confidence and the rest of widespread public sector job cuts in the next few years.

The average price of a British home stands at £162,657.