Sliding house prices add to pressure for rates cut

Sliding house prices and weak consumer confidence intensified calls for a reduction in borrowing costs next week despite ongoing fears over inflation.

The cut is unlikely to be as dramatic as those seen in the US, where the Federal Reserve has slashed rates by 1.25 percentage points this month.

The Fed lowered rates from 3.5% to 3% last night having slashed them by three-quarters of a point last week as it tried to stop the world's biggest economy from sliding into recession.

Economists reckon the Bank will cut UK rates by a quarter-point to 5.25% as the monetary policy committee takes a more cautious approach, particularly with inflation threatening to rise.

Mortgage lender Nationwide today said house prices fell by 0.1% between December and January - the third consecutive monthly decline.

The average price of a house fell from £182,080 to £180,473, although this is still 4.2% higher than in January last year.

"This figure is down from 4.8% in December and represents the lowest rate of annual house price inflation since December 2005," said Martin Gahbauer, senior economist at Nationwide.

He warned that potential buyers were put off by fears over the economy, the prospect of price falls, and high mortgage costs. "This undoubtedly signals a continued cooling in annual house price inflation during the months ahead," said Gahbauer. "The drop in demand was particularly acute among first-time buyers, who found it increasingly difficult to raise the deposits needed to climb onto the housing ladder."

The Bank of England yesterday said mortgage approvals fell from 81,000 in November to 73,000 in December - the seventh consecutive fall.

Economist Howard Archer of Global Insight predicted house prices would fall by 5% in 2008 - revising its earlier forecast of 3% - and "to remain muted in 2009".

He said: "It is clear the housing market has started 2008 as it ended 2007, under substantial pressure from increased affordability pressures and tightening lending practices. This adds to the already intense pressure on the Bank of England to cut interest rates by at least a further 25 basis points [quarter of a percentage point] to 5.25% next week and to enact further reductions thereafter.

"However, inflationary concerns are likely to limit the pace of Bank of England interest rate cuts."

A survey by GfK NOP also showed consumer confidence remained weak this month with its barometer at minus 13 - one point better than in December but 23 below last January.

Rachel Joy of GfK NOP said: "Despite a small upturn in the over-all index, confidence continues to be weak. Fear of recession continues to see consumers still reluctant to be making big-ticket purchases, and falling interest rates, coupled with a desire to reduce debt, means that now is not a good time to save."

How house prices have fluctuated