Pound Falls as House Prices Drop Most Since 2001

The pound fell against the euro and gilts rose after U.K. house values dropped in July by the most in at least seven years, increasing concern the economy is headed toward a recession.

The pound slipped to its lowest level in a week against the euro after Hometrack Ltd., a London-based research company, said the average cost of a residential property in England and Wales fell 4.4 percent from a year earlier.

The British currency weakened to 78.95 pence per euro at 5:06 p.m. in London, from 78.87 pence at the end of last week. It was at $1.9941, from $1.9916. The pound dropped 6.9 percent versus the euro this year and is little changed against the dollar.

The average cost of a residential property in England and Wales slipped to 168,500 pounds ($336,000), that's the biggest annual drop since the index started seven years ago, Hometrack said. Prices fell 1.2 percent from June.

Bank of England data on mortgage approvals to be published tomorrow are likely to signal further weakness in the housing market, according to a survey of analysts. The number of loans agreed for home purchases dropped to 37,000 in June, from 42,000 in May, the median of 24 forecasts gathered by Bloomberg shows.

Slowing economic growth and the prospect of cuts in the central bank's benchmark interest rate will weaken the pound to $1.90 and 79 pence per euro by year-end, according to the median forecast of analysts and strategists surveyed by Bloomberg. The central bank left its key rate at 5 percent on July 10.

The odds of policy makers cutting interest rates for a third time this year slipped, with the implied yield on the December short-sterling futures contract at 5.79 percent, compared with 5.81 percent at the end of last week.

TradingEconomics.com, Bloomberg
7/28/2008 10:09:33 AM