House prices may suffer says Nationwide

Britain’s biggest building society, the Nationwide, has warned that house prices will suffer if financial markets fail to recover from recent turmoil created by the credit crunch. This is the first time a leading mortgage lender has made a comment on the possibility of a housing price collapse in London.

The society’s chief economist Fionnuala Earley said: “The impact on London property prices can only be negative compared to the current situation - particularly at the top end.”

Although house prices have remained fairly robust during the month of financial market upheaval, Ms Earley said there was a danger in the medium term that they could be hit as the economy of the UK is so heavily reliant on financial services.

House price inflation in London was a strong 15.5% in the year to July , but if City bonuses were to dry up or there were significant job losses then capital house prices would surely be hit. In prime London some homes have seen prices rise by over 50% on the last two years.

Nationwide’s latest house price data showed a slight slowdown across the country. House prices were up by just 0.6% in August, giving annual house price inflation of 9.6%, down from 9.9% in July.

Ms Earley said: “The US sub-prime crisis has created turmoil in international financial markets but this is unlikely to have a significant additional effect on the rate of growth of house prices in the UK in the short term. We still expect house-price growth in 2007 to come in close to the middle of our forecast range of between 5% and 8%.”

But she warned that things could become less predictable, and the fallout from the US sub-prime crisis might have a more severe impact on the UK housing market in the longer term.

“A prolonged market downturn would be uncomfortable for the overall economy, given the importance of this sector to economic growth over several years,” she said. “Such a downturn would not only affect investment bankers but would also have negative knock-on effects for legal, accountancy and other professional services that have benefited from the structured credit boom. On top of this, jobs in restaurants, cafés and other services catering for City workers would also be affected.”