December falls add to house price fears

House prices fell in December, the Nationwide reported yesterday, dragging the annual rate of property inflation to its lowest for nearly three years.

The news, coming on top of the weakest November mortgage lending figures in eight years on Wednesday, shows the housing market will kick off 2005 in poor shape, with the Bank of England predicting further falls in the coming months.

The Nationwide said the average house price, which has trebled in the past eight years, fell 0.2% this month from November after a surprise 0.9% rise the month before. The average house is now worth £152,623.

The drop was smaller than markets had expected and so the pound moved up from the 14-month low against the euro it hit on Wednesday as dealers thought the Bank would not need to cut interest rates in the near future. Prices are now 12.7% higher than in December 2003, down from a rate of 15% in November.

Nationwide's chief economist Alex Bannister said that 2004 had been a year of two distinct parts with prices rising 11.4% in the first seven months of the year but only 1.2% in the last five months.

Many experts put the tipping point for house prices as June when Bank governor Mervyn King warned that house prices had risen so far they were in danger of falling.

"The recent slowdown in monthly house price growth and the falls in housing market activity, in part, reflect the changing economic backdrop," said Mr Bannister.

"Five interest rate increases since November 2003, relatively subdued take-home pay growth and stretched affordability have acted as a brake on the housing market."

He added that the number of first-time buyers last year, at 349,000, was the lowest since the mid-1980s.

Nationwide said that house prices had trebled since 1995 but average pay had gone up by only 50% in the same period, making it increasingly difficult for first-time buyers to enter the market.

The lender is predicting that house prices will be broadly static next year, rising by between zero and 5%.

The International Monetary Fund warned last week that there was still a risk of a house price crash. Many experts think prices could fall by 20% or more in the next two to three years.

"The big unknown is whether the housing market downturn will deepen and become extended next year, or whether activity will gradually stabilise at a lower level as the year progresses," said Howard Archer, economist at Global Insight.

Separate figures out yesterday showed consumer confidence remained broadly positive in spite of higher interest rates and a slowing housing market.

Martin Hamblin GfK's monthly index of confidence rose for the third month running in December to -3.

"Consumers have shown increased optimism about the general economic situation this month," said Reza Chady, director at GfK Martin Hamblin.

A report from the Council of Mortgage Lenders showed that, contrary to myth, Britain does not have anything like the highest level of home ownership in Europe.

The UK's figure of 69% of people owning their own homes is in line with the European average and the 14th highest in Europe, the CML said as it urged the government to do more to boost home ownership.

The UK's percentage of social housing, at 21%, is the fifth highest in Europe while the share of the market accounted for by the private rented sector, at under 10%, is the eighth lowest.