Pound Declines as Home Prices Fall Amid Weaker Economy

The pound fell to one-month low against the euro after U.K. reports showing weakness in the housing market underlined the fragility of Britain’s economy.

Sterling extended last week’s decline against the dollar as Rightmove Plc said home sellers may need to lower prices to lure buyers, and Halifax data showed house prices declined last month. U.K. government bonds rose after Lloyds Banking Group Plc said a measure of job security dropped to a four-month low, boosting demand for safer assets. Britain’s first double-dip recession since the 1970s deepened in the second quarter, the government said last month.

“The pound is trading on the defensive,” said Lee Hardman, a foreign-exchange strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “Downside risks to the housing market are rising because of the deteriorating outlook for the U.K. economy.”

The pound dropped 0.4 percent to 79.47 pence per euro at 4:47 p.m. London time after falling to 79.63 pence, the weakest level since July 6. Sterling slipped 0.1 percent to $1.5621, following its 0.7 percent-decline last week.

Sterling is likely to depreciate about 4 percent to $1.50 in the next three-to-six months, Hardman said.

Forty-nine percent of potential home buyers said prices in their area were above a “fair and reasonable” level, Rightmove, the operator of the U.K.’s biggest property website, said in a report. Only 36 percent of sellers have that view.

Market ‘Blighted’

There is a “significant price gap” between the two groups, said Miles Shipside, commercial director of Rightmove in London. “Sellers need to address this valuation mismatch in order to be successful, at a time when the U.K. housing market continues to be blighted by low transaction levels.”

House prices fell 0.6 percent in July from June, when they gained a revised 0.8 percent, Halifax said in a statement today.

“Weakness in the economy started to weigh on demand for housing in the early summer,” Annalisa Piazza, a fixed-income analyst at Newedge Group in London, wrote in a note to clients. “All in all, not an encouraging picture for housing activity in the U.K.”

The pound has dropped 2.5 percent in the past three months as the economy worsened, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The dollar rose 1.2 percent, and the yen gained 3.6 percent.

Lloyds Bank said its index of job prospects rose to minus 51 in July from minus 53 in June. A measure of job security fell to a four-month low of minus 19.

Gilts Gain

The benchmark 10-year gilt yield dropped seven basis points, or 0.07 percentage point, to 1.49 percent. The 4 percent bond due in March 2022 gained 0.66, or 6.60 pounds per 1,000-pound face amount, to 122.305.

The Bank of England, which kept its bond-purchase target at 375 billion pounds last week, will publish new quarterly forecasts on Aug. 8. All 16 economists in a Bloomberg News survey say the central bank will lower its economic outlook for this year, while all but one predict a reduction in the projections for 2013.

Gilts have returned 3.5 percent this year, indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies showed. German bunds earned 3.3 percent and U.S. Treasuries made 2.4 percent, the indexes showed.

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