UK house prices fall 0.2 per cent in December

British house prices fell for the second time in three months in December, bringing the annual rate of increase down to its lowest level in nearly three years, the Nationwide building society said yesterday.

But while the mortgage lender's report clearly suggested that Britain's long-running property boom is over, the decline was smaller than expected, knocking gilts and pushing up the pound as dealers reckoned that interest rate cuts anytime soon were therefore less likely.

Nationwide said the average house price fell 0.2 per cent this month to £152,623 following a 0.9 per cent gain in November.

That left prices 12.7 per cent or £17,000 higher than a year earlier, but compared with a 15 per cent annual gain in November.

"House price surveys are still pointing to a relatively soft landing for the UK property market," said Adam Cole, senior currency strategist at RBC Capital Markets.

Certainly that was the view at Nationwide which sees prices rising further in 2005 but by no means near the double-digit increases of recent years.

"The recent slowdown in monthly house price growth and the falls in housing market activity, in part, reflect the changing economic backdrop," said Alex Bannister, Nationwide's group economist.

"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 noted that prices rose by 11.4 per cent in the first seven months of the year but since then have only gone up by a further 1.2 per cent.

The Bank of England said in its November inflation report that it expects house prices to fall modestly for a period, but the International Monetary Fund said last week it still saw the risk of a sharp correction in house prices as one of the main dangers facing the UK economy.

House price levels are of key economic importance in the UK where two-thirds of households own their own homes.

One factor hurting prices this month was a shortage of newcomers to the housing market.

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

Only 349,000 properties were bought by first-time buyers in 2004, the lowest figure since the mortgage market was deregulated in the mid-1980s.

Nationwide said it expected house prices to grow by between zero and five per cent over 2005 but that the likelihood was that price growth would be toward the bottom end of that range, probably at two per cent.

"Broadly favourable economic conditions combined with the ongoing imbalance between the demand for housing and the rate of new build mean that a significant decline in prices will be avoided," Mr Bannister said.

"Whilst this cannot be guaranteed with certainty, indications are that following the downward shift in activity and price growth during late 2004, the housing market may be beginning to stabilise."