Dec. 17 (Bloomberg) -- London led the biggest drop in U.K. home values for at least five years this month as higher mortgage costs and the prospect of further declines in prices kept away buyers, a report by Rightmove Plc showed.

The average London asking price fell 6.8 percent to 384,632 pounds ($774,000) from November, the largest decline since the survey of real-estate agents' listings began in 2002, Britain's most-used property Web site said today. Across the U.K. as a whole, home costs dropped 3.2 percent, also the most on record.

``The market is tough out there,'' Miles Shipside, the company's commercial director, said in an interview. ``We see a flat outlook for next year, with no price rises, as we work our way through this liquidity crisis.''

The Bank of England this month cut the benchmark interest rate for the first time in two years, citing the threat of an economic slowdown. Confidence among British real-estate agents has slumped as pricier mortgages and the worst performance for property values since 1995 discourage homebuyers.

Prices in the London region fell an average of 28,099 pounds on the month and all 32 areas of the capital in the survey had declines, led by the districts of Hackney, Tower Hamlets and Islington, Rightmove said. Home costs in Kensington and Chelsea, where Russian billionaire Roman Abramovich lives, fell 4.9 percent to 1.65 million pounds.

`Bated Breath'

``The market is obviously on the turn,'' said Jonathan Slater, a chartered surveyor at Foster Slater in central London. ``A lot of people are waiting to get through Christmas. There's a lot of bated breath and nobody quite knows what's next.''

Home values averaged 232,396 pounds following declines in nine out of the 10 regions of England and Wales surveyed by Rightmove, with only the West Midlands gaining. After London, the biggest drop was in the southeast, where prices fell 3.8 percent on the month.

U.K. real-estate agents and surveyors became the most pessimistic about house prices since at least 1998 last month, the Royal Institution of Chartered Surveyors said Dec. 13. Mortgage lender HBOS Plc said Dec. 5 that home values fell for a third month in November, the worst streak in 12 years.

Britons, whose debt totals 1.4 trillion pounds, face higher loan costs after contagion from the U.S. subprime-mortgage collapse froze lending between banks. The average rate offered by lenders on a mortgage for 95 percent of the price of a property, fixed for 24 months, increased to 6.44 percent from 6.42 percent in October, the Bank of England said Dec. 11.

Loan Logjam

The U.K. central bank joined the Federal Reserve and other counterparts around the world last week as they pledged to offer as much as $64 billion to break a logjam in money markets.

The Bank of England also sought to protect economic growth with a quarter-point interest-rate cut to 5.5 percent on Dec. 6, the first reduction since August 2005.

``The bank's decision was a prudent one,'' said David Tinsley, an economist at National Australia Bank in London, who formerly worked at the central bank. ``We see other cuts in February and May. We'll see slower growth next year. The previous interest rate of 5.75 percent was restrictive.''

Before the decision, comments by policy makers including Governor Mervyn King showed they faced a dilemma on whether to lower borrowing costs as inflation pressures from record oil costs also threatened the economy. Minutes of the meeting, with a record of how they voted, will be released on Dec. 19.

Inflation Due

Consumer-price inflation probably accelerated to 2.2 percent in November, a five-month high, according to the median forecast of 23 economists in a Bloomberg survey. That data will be released tomorrow at 9:30 a.m. in London.

Inflation will reach 2.6 percent in the third quarter, creating a ``challenging year'' for the central bank as the economy weakens, the Confederation of British Industry said today. It cut its forecast for economic growth in 2008 to 2 percent from a 2.2 percent prediction made in September.

The bank ``has to keep a very careful eye on rising prices for commodities such as oil, gas and food as well as consumers' inflation expectations, whilst ensuring monetary policy doesn't unnecessarily impact on an already slowing economy,'' said Ian McCafferty, the CBI's chief economic adviser.

Other reports this week may signal if a weakening housing market has already started to affect the economy. Data due on Dec. 20 will probably show the economy grew 0.7 percent in the third quarter, the slowest pace in a year, as previously estimated, a survey of 26 economists shows.

Retail sales figures on Dec. 21 may show a 0.2 percent gain in November, after a 0.1 percent decline the previous month, according to the median of 25 economists surveyed by Bloomberg.

Sales may weaken in December, when stores make the bulk of their annual earnings, Alan Castle, chief U.K. economist at Lehman Brothers Holdings Inc., said in an interview.

``You're starting to see signs of weaker consumer spending, and that's consistent with what's happening in the housing market,'' Castle said. ``We're looking for a bad Christmas for retailers.''

To contact the reporter on this story: Svenja O'Donnell in London at sodonnell@bloomberg.net

Last Updated: December 17, 2007 05:39 EST