UK House Prices Dive in March Fuelling Fears of a Crash

House prices fell in March at their sharpest pace since the recession of the early 1990s, the country's largest mortgage lender says, raising expectations that interest rates will be cut this week. The surprisingly severe drop reinforced opinions that the housing market faces a bleak year as mortgage lenders grow more cautious and the credit crunch feeds through to households. It is also another blow for Prime Minister Gordon Brown before regional and London mayoral elections as his reputation as a safe pair of hands on the economy fades.

House prices fell 2.5% during last month, the Halifax said, more than six times as much as analysts had forecast and the largest monthly decline since September 1992. The annual three-month rate of house price inflation stood at 1.1%. Six months ago, that rate was in double figures. "The stunningly large drop in house prices in March is the second largest in the history of the Halifax index, beaten only by the fall recorded in 1992 when the housing market was in the grips of a full-blown crash," said Seema Shah, a property economist at researchers Capital Economics. "There is a clear risk that this housing market correction will be sharper and deeper than we currently expect."

In a study just released by the International Monetary Fund, UK house prices are calculated to be 27% above the rate suggested by underlying fundamentals. Only two countries, Ireland and the Netherlands, have more severely overvalued markets, and Irish house prices are already collapsing. It is far from clear that recent UK price rises have been triggered by the global leverage bubble - the IMF evidence seems to point in the other direction - but it is clear its collapse threatens to cause a severe correction. This, rather than the downturn in the financial sector, is the real threat to the stability of Britain's economy. And the Bank of England needs to address it urgently, starting by cutting the bank rate on Thursday.

"The overall impression is that house prices were buckling markedly even before the latest escalation of the credit crunch," said Howard Archer, an economist at Global Insight. "The increasing danger of a sharp housing market correction heightens pressure on the Bank of England to cut interest rates." Most economists expect house prices to fall this year as the credit crunch bites into the real economy. All the major lenders have withdrawn mortgages covering 100% of a property's purchase price as they grow more cautious and tighten up their terms. But Halifax said the price decline may be only slight due to strong economic fundamentals. "We expect there to be a modest fall in UK house prices this year," said Martin Ellis, chief economist at Halifax.

However, such a big fall in the value of British homes in one month won't brighten the public mood as fears grow of a global economic downturn and a recession in the United States. With regional and London mayoral elections on May 1 and the Labour Party falling behind the Conservatives in opinion polls, Brown is unlikely to be able to rely on his economic reputation to woo voters. Brown's leadership rating is at its lowest yet and a third of voters think he is worse than his predecessor Tony Blair, according to a Populus poll for The Times. "The striking feature of the poll is the public's pessimism about the outlook for the economy and the current state of Britain," political commentator Peter Riddell wrote in The Times. "It is very hard to see this getting any better for Brown over the next year or so. (His) only hope is that the economic downturn will not be too severe or too long." Read more about Commercial Property.

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