Oct. 11 (Bloomberg) -- U.K. house prices fell in September for a second month, the first back-to-back drop since 2005, after higher interest rates and concern about the economic outlook hurt confidence, the Royal Institution of Chartered Surveyors said.

The number of real-estate agents and surveyors saying prices dropped outnumbered those reporting gains by 15 percent, London- based RICS said today. That compares with 3 percent in August. Among 12 regions surveyed, prices only rose in London and Scotland.

The number of potential homebuyers fell the most since 2003, RICS said. A jump in credit costs led to a run on the deposits of mortgage lender Northern Rock Plc and five interest-rate increases in a year has increased households' record debt burden.

``The market has become much quieter following the banking crisis, and the likelihood of further increases in mortgage rates,'' said Alan Coy, an estate agent at Bannister & Co. in Suffolk, east England. ``We are expecting much reduced activity for the last quarter of 2007.''

At 5.75 percent, the Bank of England's benchmark rate is the highest among the Group of Seven industrialized nations. The last time the RICS survey showed successive declines was in the 15 months through October 2005.

HBOS Plc, Abbey and other lenders have increased mortgage rates after losses in the U.S. subprime market made commercial banks around the world more reluctant to lend to each other, pushing up market interest rates. Higher credit costs forced Northern Rock to apply for emergency funding last month, leading to the first run on a U.K. bank in more than a century.

`Sharp Correction?'

Today's RICS survey `` is likely to heighten concern that the correction could ultimately be sharp'' in the housing market, said Howard Archer, an economist at Global Insight in London. He said he's particularly concerned about the drop in new buyer inquiries.

Chancellor of the Exchequer Alistair Darling on Oct. 9 cited the credit rout when he cut the government's growth forecast for next year. The Treasury now expects the economy to expand between 2 percent and 2.5 percent, lower than the range of 2.5 percent to 3 percent predicted in March. The British Chambers of Commerce said today ``the U.K. economy is set to slow markedly.''

``Deteriorating confidence is being driven by the demand side of the market, with interest rate increases and financial market uncertainty depressing surveyors' outlook,'' according to the RICS report. Surveyors' confidence in the outlook for prices fell to the lowest since May 2005, it showed.

Higher Mortgage Costs

The average rate on a mortgage fixed for two years, the most popular type, rose to a seven-year high of 6.58 percent in August for borrowers with a 5 percent deposit on their homes, according to the Bank of England. Mortgage approvals fell to a fourth-month low that month, the central bank said Oct. 1.

Today's report is the latest to suggest the U.K.'s decade- long housing boom is cooling. HBOS Plc, the U.K.'s biggest mortgage lender, said prices fell for the first time in nine months in September, and London-based research group Hometrack Ltd. said Oct. 1 that values were unchanged last month.

Nor is the Bank of England signaling it's ready to help the housing market or the banking system. Governor Mervyn King said Oct. 9 he's reluctant to cut interest rates from the current six- year high to shield lenders from higher credit costs and said he's still concerned about inflation pressures.

The median forecast in a Bloomberg News survey of 22 economists is for rates to be unchanged at the end of the year.

A shortage of housing may still support the market. Building stagnated at 148,000 new units a year on average between 1989 and 2005, down from a peak of 425,000 in 1968, government figures show.

The number of homes put on the market declined for a fourth month, with 21 percent more surveyors reporting a fall than a rise in new instructions to sell property, RICS said.

``With a lack of supply in the market it's hard to envisage a material decline in prices,'' said Simon Rubinsohn, chief economist at RICS.

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

Last Updated: October 11, 2007 07:20 EDT