Oct. 29 (Bloomberg) -- U.K. house prices fell for the first time in two years in October, and mortgage approvals dropped to a 26-month low, signs the country's decade-long housing boom is coming to an end.

The average cost of a home in England and Wales dropped 0.1 percent to 176,100 pounds ($361,462) from September, research group Hometrack Ltd. said today. Central London led the declines. Separately, the Bank of England said banks granted 102,000 loans for house purchase in September, the fewest since July 2005.

A jump in credit costs is threatening to slow London's financial services industry and is adding to the debt burden on British homeowners. In the capital, which has fueled a tripling of U.K. house prices since 1997, bankers will cut the portion of bonuses invested in property by 60 percent in the next year, according to real estate broker Savills Plc.

``The average City dealer doesn't see real estate as that good an investment anymore,'' said Yolande Barnes, research director at Savills, which specializes in selling luxury homes.

Average London prices fell 0.2 percent to 316,000 pounds in October, Hometrack said. Prices in southwest London and Hampshire in southern England dropped 0.4 percent. In Cambridgeshire and Oxfordshire, they declined 0.3 percent.

The housing market has sputtered since the Bank of England raised its benchmark interest rate to a six-year high of 5.75 percent in July and an increase in market borrowing costs led to a run on deposits at Northern Rock Plc, the first in more than a century.

Housing Market

House-price growth will slow next year to 1 percent from 7 percent in 2007, the Council for Mortgage Lenders, which represents British home-loan providers, said in a report today.

``Evidence is now coming pretty thick and fast that housing market activity is being squeezed,'' said Howard Archer, an economist at Global Insight in London. House prices fell in nine of the 10 regions surveyed by Hometrack for today's report, with only the West Midlands showing no change.

The collapse of the U.S. subprime mortgage market will hurt the bonuses that bankers and traders have spent on property in fashionable areas such as Notting Hill, Kensington and Chelsea. About 6,500 bankers and fund managers may lose their jobs next year in the biggest cuts since 2000, and payouts may fall by almost a fifth to 7.4 billion pounds, the London-based Centre for Economic and Business Research Ltd. estimated this month.

Bonus Money

The amount of money from bonuses invested in homes will fall to 2 billion pounds from 5.5 billion pounds in the coming year, says Savills.

The number of buyers registering with estate agents fell for a fourth month, declining 6.4 percent, the report showed.

Rising mortgage costs are making it harder for households to shoulder a record 1.4 trillion pounds of debt. The interest rate on a mortgage fixed for two years was 6.33 percent in September, compared with 5.41 percent a year earlier, according to the Bank of England. Policy makers have raised their key rate five times since August 2006, taking it to 5.75 percent, the highest among the Group of Seven industrial nations.

Home repossessions will rise by 50 percent next year to 45,000 from 30,000 in 2007, as borrowers struggle to make loan repayments, the Council of Mortgage Lenders said.

``The housing and mortgage markets are facing their most challenging period since Labour came to power a decade ago,'' said Michael Coogan, the group's director general, in a statement. ``Most borrowers will cope, but not everyone will escape unharmed.''

Chancellor of the Exchequer Alistair Darling on Oct. 9 forecast economic growth in the U.K. may slow by a third to as little as 2 percent next year as higher rates curb consumer spending.

``Rising concerns about the overall state of the economy may well make people more unwilling to risk stretching themselves to buy a house,'' said Archer.

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

Last Updated: October 29, 2007 13:16 EDT