House prices go on the slide

HOUSE prices are falling at their fastest rate for nine years, according to one of the country's most influential property studies.

A monthly survey from the Royal Institution of Chartered Surveyors, regarded by economists as one of the most reliable future indicators for the property market, suggests three interest rate rises in four months over the summer had dented confidence.

Almost a third more surveyors reported a fall than a rise in house prices over the three months to September - the highest ratio since 1995. House sales were down 14% on a year earlier.

'The Bank of England is getting what it wanted. The housing market is slowing down with the economy, after consistent interest rate rises,' said RICS spokesman Ian Perry. 'The medicine is working. The slowdown is desirable from the point of view of market sustainability and may mean that further rates rises are unnecessary for the time being.'

The UK base rate has climbed from a low of 3.5% last year to 4.75% today. Lenders have passed on the rises to customers, with average mortgage repayments on a £100,000 25-year loan climbing from £621 a month to £731.

RICS also said buyers' enquiries were down for the fifth consecutive month. The decline in buying activity was more pronounced in northern England and the Midlands than in southern England, including London. Scotland was the only location where prices rose in September, the report said.

Despite the gloomy figures, RICS said it was unlikely that the housing market would experience a deep or prolonged downturn in prices so long as the economy remained stable and people were confident about job security.

The vast array of property data published by lenders has generally pointed to a slowdown in the property market.

The Nationwide building society said values rose just 0.2% in September after a 0.1% increase in August. Halifax said prices fell 0.6% in August, but that they bounced back 1.4% in September – and were up 20.5% year-on-year.

Experts have been split on the house price debate in recent weeks. The International Monetary Fund's World Economic Outlook report recently warned that UK homes are 20% overvalued while respected City fund manager Neil Woodford predicted prices would fall between 30% and 40%.

However, other economists argue that the market remains underpinned. Research from City broker Keefe, Bruyette & Woods yesterday said the base rate, currently 4.75%, would have to rise to 9% before mortgage repayments returned to the 'afforability constraints' of the early Nineties, when prices crashed.

It said another reason mortgages are cheaper is that more people choose special discounts. KBW estimates that only 10% of borrowers pay pricey standard variable rates compared to 40% in 2000.

The broker also estimates that the base rate would have to hit 6.1% before average income from buy-to-let was wiped out, impacting that sector of the market. Despite the upbeat assessment, even KBW predicted prices would fall 10% in 2005.

Economists say another rise in interest rates this year is looking increasingly unlikely after evidence of a property slowdown and a fall in consumer prices inflation. Some have suggested that rates may have already peaked.

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