Sellers having to drop prices as housing crash confirmed

Two leading City banks stated that Britain is now most definitely in the depths of a housing crash, following the Bank of England's decision to hold interest rates at 5%.

With the supply or mortgage credit drying up, analysts at Citigroup and Dresdner Kleinwort said the UK will now experience a property slump rivalling that in the US.

'A serious housing crash is now under way,' said Citigroup economist Michael Saunders. The shocks hitting Britain from the credit crunch and rising inflation are 'very severe'.

Alastair Stewart of Dresdner said indicators from the homebuilding industry are all at their lowest ebb since the early 1990s, when annual price declines approached 10%. Last month alone the number of new homes being reserved plunged an annual 65% as buyers struggle to obtain mortgages.

The Bank of England, which next week outlines its quarterly growth and inflation forecasts, ignored pleas for lower rates after policymakers, including Governor Mervyn King, warned inflation could breach its 3% ceiling this year.

Some economists had predicted a reduction, but the falling value of the pound and soaring food and energy prices forced the BoE's hand.

The Bank didn't release any statement with its rates decision. But European Central Bank President Jean-Claude Trichet was candid about the threat from rising prices after holding euro zone rates at 4%.

'Inflation rates are expected to remain high for a rather protracted period of time before gradually declining again,' he said.

International Monetary Fund deputy chief John Lipsky said accelerating inflation 'must be taken seriously as it creates potentially significant challenges to economic stability.'

Roger Bootle, economic adviser to accountants Deloitte, said the MPC will eventually have to cut rates 'dramatically' because there's a danger of a 20% house-price slump.

'By deciding not to cut interest rates today, the MPC risks presiding over the deepest and longest economic downturn since the recession of the early 1990s,' he said.

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