April 15 (Bloomberg) -- The Royal Institution of Chartered Surveyors' measure of sentiment in the U.K. housing market fell to the lowest since records began in 1978 in March as mortgage lending dried up.

The number of residential property agents and surveyors saying prices declined exceeded those reporting gains by 78.5 percentage points in March, compared with 65.7 points in February, RICS said today. A gauge of price expectations dropped to a 10- year low. A separate report showed retail sales fell for the first time since 2006.

Falling house prices threaten to exacerbate the slowdown in the economy, which may grow 1.6 percent this year, the least since 1992, the International Monetary Fund predicts. The Bank of England cut the benchmark interest rate for the third time since December this month after banks raised borrowing costs and curbed mortgage lending.

``The situation we have is serious and it will get worse,'' David Stubbs, an economist at RICS, said in an interview on Bloomberg Television. ``It will take more interest-rate cuts and a restoration of confidence before we see a return to health.''

The pound dropped to a record 80.64 pence against the euro after the report and traded at 80.478 pence at 10:53 a.m. in London. Against the dollar, the U.K. currency fell to $1.9688.

`Concerned' Shoppers

Revenue at shops open at least a year fell for the first time in two years in March, declining by 1.6 percent from the same month in 2007, the British Retail Consortium said. The group, which represents 80 percent of U.K. retailers, conducted its survey of stores from March 2 to April 5.

``Here is the strongest evidence yet that customers are making serious economies and are increasingly concerned about the future,'' Stephen Robertson, director general at the BRC, said in a statement.

Gains in consumer prices are also eroding shoppers' spending power. Inflation stayed at 2.5 percent in March, the statistics office said today.

The RICS balance of buyers registering with property agents fell to minus 49, the lowest since March 2003. The price balance for London dropped to minus 76 from minus 60, the lowest since February 2003. The only region where home values rose was Scotland, the report showed.

``We are finding it harder to get applicants to view,'' said Richard Cotton, a surveyor at Cluttons in London's Holland Park neighborhood. ``They feel the market is dropping.''

Brown's Reputation

Prime Minister Gordon Brown, whose reputation for economic competence is threatened by the housing slump, says the economy will remain resilient this year. Unemployment is at the lowest since 1975, and manufacturing in February unexpectedly climbed to the highest level in seven years.

``No country can insulate itself from the current volatility affecting global financial markets,'' Brown will say in prepared remarks at Goldman Sachs Group Inc. in London today. ``But just last week the IMF forecast that Britain would be the fastest growing of the world's major economies this year.''

Banks are making it harder for Britons to secure mortgages after the collapse of the U.S. subprime market, which will result in $945 billion in losses worldwide, the IMF predicts.

The credit squeeze may lead to almost 20,000 job losses in London's financial services industry in the next two years, and employment levels may not recover until 2012, the Centre for Economic and Business Research Ltd. said April 13.

The Bank of England cut its main rate by a quarter-point to 5 percent on April 10, its third since December, and JPMorgan Chase & Co. economist Malcolm Barr said today policy makers may step up the pace of reductions.

`Settled Pattern'

``Since December, the Monetary Policy Committee appears to have settled into a pattern of rate cuts at alternate meetings, but we believe enough weakness is becoming evident in the data to generate a quicker move,'' said Barr. He now forecasts the bank to cut borrowing costs in May and July, taking the main rate to 4.5 percent.

Banks have declined to pass on the central bank's reductions, and the cost of two-year, fixed-rate home loans with smaller deposits rose to the highest since 2000 last month. The number of mortgage products for residential borrowing plunged to 3,392 yesterday, a 65 percent drop since Feb. 1.

``Sentiment is at a very low ebb and will continue to remain depressed while the economy suffers from this unique liquidity blight,'' said Jeremy Leaf, a spokesman for RICS. ``The slowdown in prices is directly attributable to a lack of available finance which has hit demand.''

To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net.

Last Updated: April 15, 2008 05:54 EDT