Housebuilders hit by King's warning

Treasury chief economic adviser Balls seeks to calm fears. Estate agents report slump in new inquiries

Shares in housebuilders slumped yesterday amid mounting fears that homebuyers are fleeing the market in the wake of warnings of higher interest rates and falling prices.

Shares in housebuilders slumped yesterday amid mounting fears that homebuyers are fleeing the market in the wake of warnings of higher interest rates and falling prices.

Comments by Mervyn King, the Governor of the Bank of England, on Monday night that house prices could fall triggered a sell-off among housebuilders. With gains across all FTSE sectors, mortgage lenders and housebuilders stood out with their losses despite an attempt by Ed Balls, the Chancellor's chief economic adviser, to calm fears.

The gloom was compounded by new figures showing the number of new inquiries by househunters plummeted by a quarter over the spring.

The figures will add to mounting anecdotal evidence that the red-hot property market was cooling even before the Bank raised rates last week.

The National Association of Estate Agents said its survey of 10,000 members showed new inquiries fell by 24.1 per cent in the past three months, pointing to an unwillingness to enter a housing market with an "uncertain future".

Richard Hair, its president, said: "The Governor's comments are reflecting the current story in the housing market. We are seeing a definite wariness amongst the public to commit to a market which they fear may be slowing." But he insisted the market was still healthy with prices "soaring" 2.25 per cent in May. "Sales and viewings are still strong," he said. "Further price increases indicate that homebuyers are still willing to pay close to the asking price for the property they want."

On the stock market, HBOS, owner of mortgage giant Halifax, lost 1 per cent, Abbey fell 0.6 per cent, and Barclays fell 0.5 per cent. Shares in builders George Wimpey, Wilson Bowden and Bellway were down between 2 and 4 per cent. Countrywide, the estate agency, dropped 1.4 per cent. Mark Hughes, an analyst at Numis Securities, said: "This kind of headline-grabbing comment is not helpful as the housebuilding stocks react badly to negative sentiment.

In his address to the CBI in Glasgow, Mr King urged homebuyers to "consider carefully" the chances that house prices could fall and interest rates rise. He said current levels of house-price growth were "unsustainable" and warned the chance of a crash had increased.

Analysts said the Governor was sending a message that the Bank of England would not bail out homeowners by cutting interest rates. "The news that has concerned the Bank was that homeowners appeared to have ignored the change in the rate cycle," said John Butler at HSBC. "The Bank is now warning consumers if they do not react to the half-point hike put in place over the past two months then even more aggressive hikes will come."

Mr Balls said the Treasury and the Bank were concerned about the pace of gains in house prices. "No one can afford to be complacent where stability and the housing market are concerned," he told the Chartered Institute of Housing's annual conference. But he played down fears that the housing market was running out of control, saying there was good evidence to suggest household balance sheets were consistent with overall economic stability.

He said prices reflected rising demand, restricted supply and greater confidence in economic policymaking. "Homeowners and businesses can have confidence that Britain will steer a course of stability for the British economy," he said. Mr Balls also delivered a sideswipe at high street banks for abandoning poorer borrowers. "When these families get into difficulty, it is often the unwillingness of mainstream banks to stay engaged that leaves them at the mercy of the unregulated sector," he said.