Biggest house price fall since 1983

Biggest house price fall since 1983

Britain's biggest mortgage lender yesterday heightened growing recession fears when it revealed that the year-long credit crunch had wiped £20,000 off the cost of a home in the biggest annual fall in property prices on record.

On the day that rising inflation forced the Bank of England to leave interest rates unchanged at 5%, the Halifax said house prices last month were 11% down on a year earlier - the first double-digit decline since its monthly healthcheck of the market was first published 25 years ago. Prices in the past six months have been falling at an annual rate of 20%, but the Treasury sought last night to downplay the prospect of a stamp duty holiday for first-time buyers, saying it was only one of a number of options being considered for an autumn economic package.

Advertisement starts

---

---

Advertisement ends

Business groups and City analysts warned that deep and rapid cuts in the cost of borrowing would be needed next year to pull Britain out of its first recession in more than 15 years. House prices are falling more rapidly than they were in the property crash of the late 1980s and early 1990s, while official figures released yesterday showed orders for housebuilding 33% down on a year ago and orders for commercial property down 38%.

Fresh evidence of the impact of the global financial turmoil will emerge today when the Royal Bank of Scotland is expected to unveil losses of £1.2bn - the biggest in British banking history. Barclays yesterday announced profits down by a third, warning that it saw no end to the tough conditions of the past 12 months.

Despite mounting signs that the economy is entering its first recession since the early 1990s, Threadneedle Street left the cost of borrowing on hold for a fourth month yesterday. Inflation is running at almost double the government's 2% target and is predicted to rise to around 5% over the coming months as dearer domestic energy bills affect the cost of living.

The Bank will use Wednesday's quarterly inflation report to disclose that growth will be lower and inflation higher than it expected three months ago, and while business leaders said last night they understood the constraint imposed on the Bank by a rising cost of living they urged it to act as soon as price pressures started to abate.

Stewart Robertson, director general of the British Retail Consortium, said the downturn in the high street was deepening. "To avoid turning the slowdown into a slump, as soon as conditions allow, the Bank's next rate move should be down."

Roger Bootle, economic adviser to the consultants Deloitte, said: "The longer inflation fears force the MPC to leave interest rates on hold at 5% the more severe the looming recession will be. Interest rates will, eventually, have to fall very far to lift the UK economy out of its current malaise."

He saw house prices falling by a third and that falling inflation would prompt a series of rate cuts in 2009. "Once interest rates start to fall I think that they will be cut rapidly, perhaps all the way to 3.5% by next summer, and perhaps even lower subsequently. However, this will come too late to prevent an outright recession later this year and a long period of very weak economic activity thereafter."

The Halifax said house prices fell by 1.7% in July - the fifth successive fall of more than 1.5%. The average price of a home stood at £177,351 last month, down from £199,084 in July 2007. Suren Thiru, economist at the Halifax, said: "Pressure on householders' income, together with a very significant reduction in mortgage finance due to the global financial crisis, is constraining potential house buyers' ability to enter the market. This is resulting in both lower prices and activity levels."

Although falling house prices will eventually make property more affordable for first-time buyers, City analysts believe the decline is part of a wider malaise caused by weaker demand at home and abroad, and the difficulty in securing credit.

RBS is expected today to announce a £5.9bn writedown and a loss five times as high as that reported by Barclays during the early 1990s - the previous record. Yesterday Barclays said its profits were down 30% at £2.75bn as the credit crunch forced it to take a writedown on investments that have turned toxic in the credit crunch. Chief executive John Varley said: "It would be wrong to suggest that the market conditions over the foreseeable future will be anything other than tough."

guardian.co.uk © Guardian Newspapers Limited 2008