UK Home Prices Keep Rising

U.K. house prices rose at the fastest pace in four months in October, a sign that a shortage of properties is cushioning homeowners against the effects of higher interest rates, Nationwide Building Society said.

The cost of a home advanced 1.1 percent to 186,044 pounds ($385,000) from September, Britain’s fourth-largest mortgage lender said today. Prices increased 9.7 percent from a year earlier, the report showed.

“There certainly is some resilience,” said Fionnuala Earley, chief economist at Nationwide, in a television interview. “But the underlying trend is downwards and we expect the market to slow into 2008.”

The pound rose for a fifth day against the dollar to the highest since 1981 after the report, which is at odds with recent evidence suggesting that higher credit costs are bringing the U.K.’s decade-long housing boom to an end. Research group Hometrack Ltd. said October 29 house prices dropped for the first time in two years this month and the Bank of England said mortgage approvals declined to a 26-month low in September.

The pound reached as high as $2.0743, a 26-year high, and traded at $2.0729 as of 11:43 a.m. in London.

The outlook for a cooler property market may discourage consumer spending, which is set to power the fastest economic expansion in since 2004 this year. Britons were the most reluctant to make big purchases in more than a decade this month, GfK NOP Ltd. said today.

Sharp Slowdown

“We’re still concerned about the path of the U.K. economy,” said Philip Shaw, chief economist at Investec Securities in London, in an interview. “We expect a fairly sharp slowdown in 2008.”

U.K. house-price inflation will slow to 3 percent next year from 6 percent in 2007, real estate broker Knight Frank LLC said yesterday. In London, which has led the increase in U.K. house prices, bankers will cut the portion of bonuses invested in property by 60 percent in the next year, its rival Savills Plc estimates.

The housing market may be protected by a lack of available property, Nationwide said. Building stagnated at 148,000 new units a year on average between 1989 and 2005, down from a peak of 425,000 in 1968, government figures show. The lender also said that homeowners face little pressure to sell at the moment, which may shore up house values.

“Slower demand will not have an immediate impact on prices if homeowners are in no rush to sell,” said Earley. Prices are “unlikely” to drop in the absence of a jump in unemployment, she said. The number of Britons out of work fell to a 2 1/2-year low in September.

Buy-to-Let

The mortgage lender nevertheless said that a housing market slowdown may have “strong implications” for investors considering property purchases to rent them out to tenants.

“Rents would have to rise very strongly relative to house prices to make short-term buy-to-let investments profitable at current interest rates,” said Earley.

The Bank of England raised its benchmark rate to a six-year high of 5.75 percent in July, the highest among the Group of Seven nations, and the collapse of the U.S. subprime mortgage market has also pushed credit costs higher.

That’s making it harder for households to shoulder a record 1.4 trillion pounds of debt. The interest rate on a mortgage fixed for two years was 6.33 percent in September, compared with 5.41 percent a year earlier, according to the Bank of England.

U.K. Nationwide Home Prices Rise Most Since June
By John Fraher | Bloomberg News