House price falls 'steepest for nine years'

House prices are falling at their steepest rate for nine years, prompting speculation that interest rates may have peaked. About 30 per cent more chartered surveyors reported a fall than a rise in house prices over the three months to September.

House prices are falling at their steepest rate for nine years, prompting speculation that interest rates may have peaked. About 30 per cent more chartered surveyors reported a fall than a rise in house prices over the three months to September.

The Royal Institution of Chartered Surveyors (Rics) said the drop, the biggest since 1995 and the second consecutive fall, was a reaction to the three hikes in interest rates over the summer. Inquiries from prospective purchasers were down for the fifth consecutive month and the number of unsold properties rose to its highest level for almost a year.

"The medicine is working," said Ian Perry, the Rics national housing spokesman. "The Bank of England is getting what it wanted. The housing market is slowing with the economy."

Rics said the markets in northern England and Wales were static, with the housing boom "clearly over", and there were moderate price falls in southern England, put down to higher borrowing costs. It said buyer activity declined in northern England and the Midlands, although falls in southern England, including London, were not as large as during the summer.

John Butler, an economist at the investment bank HSBC, said: "Either way, while the threat lingers the Bank is likely to keep rates on hold, concerned that they have finally burst the bubble that they were instrumental in building."

Borrowing costs have risen by a third since rates started rising in November 2003 and sales fell 14 per cent over the past year. Yesterday, Rightmove, a property website, said the market suffered its sharpest slowdown in September for a year.

The Ernst & Young ITEM Club forecast unit, which uses the Treasury's model, has said it does not believe there will be a housing crash. Rics echoed this, saying it was unlikely that the housing market would experience a deep or prolonged slump in prices in prices as long as the economy remained stable and people were confident about job security. Mr Perry said: "The slowdown is desirable from the point of view of market sustainability and may mean that further rate rises are unnecessary for the time being."

Surveyors urged sellers to be realistic when pricing their property. "The market continues to slow," said Richard Sayer, at Rook Matthews Sayer in Alnwick, Northumberland. "Overpriced properties waste time and advertising budgets so agents and buyers need to be realistic."

In Wales, several agents reported a "significant" slowdown in activity. "We anticipate prices falling in certain sectors over the next few months," said Paul Lucas at RK Lucas in Haverfordwest, west Wales.

It is a far cry from the spring when agents were reporting signs of a return of gazumping in the market, with greedy sellers ditching an agreed buyer at the last minute for a higher offer.

Analysts in the City believe the widespread evidence of a slowdown in the housing market will keep the Bank from hiking rates again for a while. Ciaran Barr, chief UK economist at Deutsche Bank, said the next move in rates would be a cut, sometime in 2005. "The weakening in global growth next year will weigh further on a domestic economy likely to be suffering from a weaker housing market," he said.

But not everyone believes it is all over for rate rises. David Hillier, chief UK economist at Barclays Capital, said: "The November rate decision should be fairly close-run, closer to 50-50 than the 99-1 the financial markets appear to think it is."

The National Association of Estate Agents said the average property price in the UK has fallen for the fourth consecutive month as buyers adopted a "wait and see" approach to the market. It said house prices were 1.6 per cent lower than the previous month, with the annual increase down to 7.95 per cent, its lowest level so far this year.