House prices fell much faster than expected last month and construction activity slowed, industry surveys showed on Thursday, reinforcing concerns that economic growth will fall off sharply.
The strongest quarterly construction growth for decades pushed British economic growth to a nine-year high of 1.2 percent in the second quarter, but Thursday's Markit/CIPS PMI survey suggests this is slowing rapidly -- driven partly by weaker house prices.
House prices dropped a bigger-than-expected 0.9 percent in August after a 0.5 percent decline in July, the sharpest fall since February, according to the monthly survey from mortgage lender Nationwide published on Thursday.
As fears of a double-dip in the housing market take hold, builders will likely feel less urgency to begin new developments, said Nomura UK economist Philip Rush.
Sterling weakened to a three-week low against the euro on the news.
A fall in the rate of new home building pushed the PMI down to a six-month low of 52.1 in August from 54.1 in July.
This was a sharper slowdown than economists had expected as the boost to Q2 output from projects delayed because of unusually icy winter weather faded away.
Those who are looking for signs of a slowdown will find plenty to worry about in this month's construction PMI, said CIPS chief executive David Noble.
The most disturbing is the marked slowdown in the residential sector as this is where much of the recent sector growth has come from. The slight increase in public-sector activity disguises continuing uncertainty about the scale of spending cuts which we have yet to experience.
Britain's coalition government, in power since May, has made tackling the public deficit its top priority and spending on infrastructure and public buildings is expected to be severely curtailed over the coming years.
Public-sector job cuts are also expected to weaken demand for house purchases.
July and August marked the first two consecutive monthly price falls since the decline in British house prices levelled off in February 2009, and the annual rate of house price growth slowed to 3.9 percent from 6.6 percent, well below forecast.
Howard Archer, UK economist at IHS Global Insight, said he expected house prices to fall 3-5 percent in the second half of this year and at least a further 5 percent in 2011.
We suspect that house prices will be at least 10 percent lower by end-2011 compared to their mid-2010 levels, he forecast.
Nationwide said the falling prices were due to a greater availability of property for sale, and that any future declines were likely to be relatively modest as low interest rates meant there were few forced sellers of repossessed property.
A dearth of supply had driven prices up by around 10 percent in the 12 months to April after a 20 percent fall between mid 2007 and early 2009.
Given that the price rises of the last year had gotten ahead of the recovery in the wider economy, the current correction is not an unhealthy development, said Nationwide economist Martin Gahbauer.
(Additional reporting by Christina Fincher; Editing by Ruth Pitchford)