Page last updated at 17:35 GMT, Tuesday, 16 September 2008 18:35 UK

Fall in house prices is confirmed

For Sale signs
There is no let up in sight for falling house prices

The fall in house prices during the past year has been confirmed by the government's own house price index.

Published by the Communities and Local Government department (DCLG), it shows that prices in July were 0.3% lower than a year ago.

That was despite a surprise 1% rise in prices during the course of July.

House prices have fallen in the past year, by about 11% some leading lenders say, because the credit crunch has choked the supply of mortgage funds.

"The current issue affecting the market is largely about the supply of credit - a very different situation to the early 1990s which was about high interest rates and unemployment," said a DCLG spokesman.

Completions

The DCLG survey, based on completed sales, shows that prices have now dropped for the ninth month in a row, which has taken the average UK property price down to 217,171.

However the picture is not uniform across the country.

Prices are down by 0.3% in England, 0.8% in Wales and 10.3% in Northern Ireland.

But in Scotland prices have risen by 3.6% over the past year.

Surveys from lenders such as the Halifax and the Nationwide have suggested that the fall in prices, in the year to August, has been much steeper than that recorded by the DCLG.

That may be due to different methodologies used in their surveys.

The lenders base their figures on prices quoted when they approve their mortgage loans.

Whereas the DCLG's survey is calculated by using completions, based on a survey of about 50,000 sales from 60 mortgage providers, a month behind the lenders.

Gloomy predictions

Economists said that because of this lag, the government's own figures may get worse.

Seema Shah, at Capital Economics, said that with "other more timely measures of house prices weakening drastically in the past few months, and with the economy heading for recession, those falls are likely to intensify over the coming months".

Analysts agree that the housing market has undergone a very severe and sudden contraction after more than a decade of steeply rising prices.

Sales are down by about 50% in the past year; mortgage approvals are down by more than 70% suggesting that sales have further to fall; and last week estate agents reported that in the three months to August, some of them were selling fewer than one property per week.

The head of the Nationwide building society, Graham Beale, has said that house prices might end up falling by as much as 25% from their peak seen in Autumn 2007.

And Andy Hornby, the chief executive of HBOS, which owns the UK's biggest mortgage lender the Halifax, has predicted that the credit crunch that is restricting lending would last well into next year.

Mortgage costs

Fixed-rate mortgage deals may be about to become more expensive as the cost of raising mortgage funds in the financial markets starts to rise.

The cost of inter-bank borrowing, as reflected in the BBA Libor three month sterling rate, rose today from 5.715% to 5.791%.

This was the biggest rise in one day since the US investment bank Bear Stearns had to be rescued in March.

In the past six weeks the average interest rates on the best two-year fixed rate mortgages had fallen by 1.16%, according to the financial information service Moneyfacts.

The best three-year fixes had come down by 0.56% and five-year fixes by an average of 0.4%.

But Michelle Slade of Moneyfacts said this trend could come to an end because of the crash of the US investment bank Lehman Brothers, and fears that other banks may be pushed into a weaker financial position.

"The number of cuts to mortgage rates has slowed in the last week," she said.

"Lenders are likely to be playing a wait and see game at the moment to see how things pan out in the money markets before they make their next moves," she added.




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