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House sales fall by half
Jonathan Prynn, Consumer Affairs Editor10 Jul 2008
London homeowners were dealt a devastating triple whammy of bad news today.
One leading firm of London estate agents said house sales in the capital had halved this year and prices were already 15 per cent down. But a City analyst forecast much worse to come and said property values would plummet 35 per cent before hitting the bottom in 2011.
The warning came as the Bank of England's Monetary Policy Committee refused to provide relief to the housing market and held interest rates at 5 per cent.
It also followed a bleak assessment from Chancellor Alistair Darling who told MPs that the British economy was under threat from the "profound" effect of soaring oil and food prices.
The interest rate freeze crowns the worst week of economic news since Black Wednesday almost 16 years ago, when interest rates jumped to 15 per cent.
There are also growing signs that the London property market, which initially appeared to be escaping the worst of the downturn, may now be in the early stages of a collapse.
Peter Rollings, managing director of Marsh & Parsons estate agents, said: "The MPC could have got away with a cut in base rate today, but choosing to hold rates was the safe move with inflation running at over 3 per cent. But next month they must cut rates.
"With the number of property transactions down 50 per cent in central London already, and prices down 15 per cent, a rise in rates would be catastrophic. Inflation might be a threat, but a property market stall would be more damaging long term."
His assessment suggests London is being hit worse than the rest of the country where prices have fallen six per cent this year, according to Halifax.
Seema Shah, property economist at Capital Economics, said it was likely the Bank would wait several more months before starting to cut the cost of borrowing.
She said: "Against that backdrop, there is plenty of scope for further house price falls. We expect house prices to fall by 15 per cent this year with an ultimate decline of 35 per cent over the next three years."
That would cut the average cost of a London home from a peak of £320,000 to £208,000, a fall of £112,000, taking prices back to 2002 levels. The decision, though widely expected in the City, is another blow for a property market reeling from soaring mortgage rates and a downturn in transactions.
Adam Lent, head of economic and social affairs at the TUC, said: "This was the wrong decision. The knock-on effects of the credit crunch and the rush of overly gloomy headlines are already threatening an over-reaction and deeper downturn than the actual economic news suggests. The Bank today should have put growth first and cut rates."
It was the third month in succession that the base rate has been left at 5 per cent. The only sliver of good news was that the base rate was not increased as some City traders had feared. The dilemma facing the Bank, which has to balance the risk of a recession against the threat of inflation was underlined by a forecast from the Institute of Advanced Motorists that drivers could be paying almost £1.50 a litre for petrol by the end of the year.
The official measure of inflation - the Consumer Prices Index - is running at 3.3 per cent, well above the Government's target of 2 per cent. However, it is widely expected to breakthrough 4 per cent by the autumn.
Speaking in the Commons, the Chancellor warned of "profound" effects on the economy and "a difficult period ahead".
Mr Darling said: "What's clear is that a combination of the effects of the credit crunch and very high oil prices means all economies are going to be affected and that effect will be profound. We all need to be vigilant here at home to get our economy through what will be a difficult period."
In the City, profits at Sports Direct halved last year, while budget clothes retailer Primark said it had seen sales growth come to a shuddering halt.
Reader views (5)
Don't blame the bank of England, blame ourselves for over borrowing on cheap credit.
- Mat, hillingdon uk, 11/07/2008 10:45
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I can't believe the comments from these EA's. The base rate could go up and it still won't effect the LIBOR rate on which mortgages are based. Calling for a cut will not reduce mortgages. The Yanks cut rates and look at the disaster that's caused. While inflation is above 2%, and has been for ages now, the must hold rates, or better still raise rates. Raising rates would help with prices as we import so much.
They talk about supporting excessive house prices. There is nothing anyone can do now. The features are in place and get ready for the mother of all recessions. House prices will be slaughtered.
- Np, Cornwall, UK (Until the food runs out), 10/07/2008 22:44
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Is he barmy? Inflation is far more damaging than falling house-prices.
Inflation drags pensioners further and further below the breadline, steals nest-eggs from savers and means hard working folk have to spend ever more hours at the grind-stone just to earn a crust.
I'd far rather see affordable housing and a country where money holds its worth than homes spiralling ever further out of peoples' reach at the same time as anything they save for one gets taken away by inflation.
- David, Guildford, Surrey, 10/07/2008 21:37
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The economy has been built on house price inflation and debt. Now the housing bubble has burst there is no alternate economic policy left. Looks like houses will revert to historic pricing (multiples of earnings) an we will have to weather a recession. If the bank of England had acted sooner then we may have avoided the bubble and the crash would have been less painful.
- David Barker, Eastbourne, 10/07/2008 16:24
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"Inflation might be a threat, but a property market stall would be more damaging long term."
Economists state that inflation is the real threat and if the Bank of England had given it priority sooner, then Interest rates would already be coming down. Lower property prices are a good thing long term.
- Adrian, London, 10/07/2008 14:57
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