U.K. House Prices Fall for First Time in Nine Months (Update1)

By Jennifer Ryan

Oct. 4 (Bloomberg) -- U.K. house prices fell in September for the first time in nine months as higher interest rates and a global credit slump cooled demand for property, a report from HBOS Plc showed.

The average cost of a home in Britain declined 0.6 percent to 198,500 pounds ($403,000) from a month earlier, compared with a 0.3 percent gain in August, the U.K.'s biggest mortgage lender said in a statement on the Regulatory News Service. Prices rose 10.7 percent in the quarter through September from a year earlier.

The housing market has sputtered after a jump in market credit costs spurred a run on Northern Rock Plc, the first on a U.K. bank in more than a century. Bank of England policy makers, who have raised their benchmark rate five times in the past year, will probably keep it at 5.75 percent today as they gauge the effect of the financial-market turbulence on the economy.

``Interest rate increases are biting now as people come off favorable fixed-rate products and move to significantly higher rates,'' Martin Ellis, chief economist at HBOS, said in an interview. ``It squeezes people's incomes and affects demand.''

The Bank of England is scheduled to announce its rate decision at 12 p.m. local time.

HBOS, Abbey and other lenders are increasing borrowing costs after losses in the U.S. subprime market made commercial banks around the world more reluctant to lend to each other, pushing up market interest rates. Higher credit costs forced Northern Rock to apply for emergency funding last month.

`Early Cut'

U.K. banks approved the fewest mortgages in four months in August, the Bank of England said Oct. 1.

HBOS's report ``boosts the case for an early cut in interest rates,'' Howard Archer, economist at Global Insight Inc., said in a research note. ``Evidence is mounting that the housing market is now cooling markedly.'' He predicts the central bank will leave borrowing costs unchanged today.

The Northern Rock crisis is still fresh in voters' minds as Prime Minister Gordon Brown considers calling an election by the end of the year to take advantage of his lead in opinion polls.

House prices fell in two of the 12 regions that HBOS tracks in the third quarter. Prices dropped 3.2 percent from the three months through June in Northern Ireland and declined 2.1 percent in northern England. London prices rose 2.3 percent.

Recent housing reports have sent mixed signals about the health of the property market. The Royal Institution of Chartered Surveyors said Sept. 13 house prices fell for the first time since 2005 in August. Two weeks later, Nationwide Building Society said prices rose at the fastest pace in three months.

Nationwide said in a separate report today that quarterly house-price growth slowed to 1.6 percent in the three months through September from 1.9 percent in the second quarter.

Britain nevertheless still faces a shortage of property, which has helped fuel gains in house prices.

Brown has pledged to place homebuilding at the center of his policies after house prices tripled in the past decade while construction stagnated. He plans to build the U.K. an extra 2 million homes by 2016.

Last Updated: October 4, 2007 04:01 EDT