House prices fall in December

LONDON - House prices fell for a second straight month in December even after the Bank of England cut interest rates, in a sign the property market slowdown is gathering pace and could spell trouble for the economy in 2008.

Nationwide building society reported on Friday that house prices fell 0.5 percent this month, taking the annual rate of increase to just 4.8 percent, the lowest since May 2006.

"There is undeniably a very real - and growing danger - that the housing market could see a sharp correction next year," said Howard Archer, economist at Global Insight.

The survey was the latest in a string of reports to suggest the economy will slow sharply next year after recording growth of around 3 percent in 2007, adding to pressure on Prime Minister Gordon Brown who is already suffering in the polls.

Consumer morale has sunk to a 12-year low, according to the GfK/NOP measure, in the wake of a global credit crunch that sparked the Northern Rock crisis, Britain's first bank run in more than a 100 years.

Further falls in house prices that actually start eroding the huge capital gains that have made hundreds of thousands of Britons into paper millionaires could inflict a serious blow to confidence that could take the whole economy with it.

According to the Nationwide, house prices in northern English cities were already 3 percent lower than last year.

Tighter lending conditions for more than a million people expected to have to refinance fixed-rate deals could also add pain to consumers already mortgaged to the hilt -- outstanding housing debt stands at more than a trillion pounds.

PAY NOW, SAVE LATER?

Household finances look set to be stretched further in 2008 also by rising food and energy costs -- the oil price was once again on Friday nearing its record high -- and as wages fail to keep pace with inflation.

Accountants KPMG predicted on Friday that a record 130,000 people would be declared insolvent next year.

"Any excessive spending over Christmas and at the New Year sales, especially where goods are paid for on credit, risks tipping even more consumers over the edge," said Mark Sands, director of insolvency at KPMG.

"The credit crunch is resulting in increased rejections of credit card applications and a reduction in the availability of loans secured by a second charge on the family home. Those in difficulty will find that their options are becoming limited."

But for now, retailers appear to be reaping the bounty of any profligacy after the usual complaints of a lacklustre start to the Christmas shopping season.

Early signs were that the post-Christmas sales got off to a roaring start as retailers slashed prices.

"We suspect that this is more likely to represent the last hurrah for many consumers before they batten down the hatches in the face of serious headwinds," said Archer.

"We suspect that the strong early showing in the sales is a consequence of increasingly pressurized and price conscious shoppers being very keen to take advantage of genuine bargains and treat themselves while they can."

News of spending in the face of price cuts, however, will be good news for Bank of England policymakers who cut interest rates by a quarter-point to 5.5 percent this month to offset slowing growth but are still worried about inflation.

Most economists are predicting further cuts ahead, especially after all nine Monetary Policy Committee members were found to have voted for this month's reduction.

That still may not be enough to save the housing market. "This time around lower interest rates are more likely to stabilise market activity rather than re-ignite it," said Fionnuala Earley, chief economist at Nationwide.