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From The Sunday Times

February 24, 2008

Comment: What Northern Rock means for the housing market

David Smith

What does the Northern Rock nationalisation, or as the chancellor prefers, “temporary public ownership”, mean for the housing market? Older readers will recall that, before the entry of banks into the market in the 1980s, it was common for the public sector, mainly local authorities, to offer mortgages.

More recently, in 1994, the Bank of England paid a notional £1 to nationalise National Mortgage Bank, a mortgage lender, three years after it had organised a banking “lifeboat” to allow it to survive. By then, however, NMB was a shell, having been run down.

We have seen nothing quite like Northern Rock in Britain. Does it mean the government has even more of a vested interest in ensuring the housing market does not collapse? Will the nationalised Northern Rock, famous for aggressively expanding its mortgage book, now run it down? With Northern Rock no longer competing hard, could the age of the highly competitive mortgage, dealt a big blow by the credit crisis, now be over?

Alistair Darling has gone on record distancing the housing outlook in Britain from the pain experienced in America. The Treasury expects a period of soft activity and prices, but not a crash. The chancellor promised to look at housing in his March 12 budget even before Sunday’s momentous announcement. Whether that includes a big increase in the stamp-duty threshold, currently £125,000, remains to be seen. Money is tight.

A big issue for the Rock is how it deals with customers facing a so-called payment shock this year. The Council of Mortgage Lenders (CML) has done some calculations on this for the industry as a whole. The shock is the jolt homeowners receive on moving from the low fixed-rate deals of two or three years ago to the pain of higher rates now. The good news, according to the CML, is that we may be moving through the worst of it.

Take the example of a two-year, 25-year £114,000 repayment mortgage coming up for renewal in the final quarter of last year. The old monthly payment was £667 while a new two-year fixed rate mortgage would have cost £781 – a rise of £114. Borrowers unlucky enough to have to go onto a standard variable rate mortgage would have faced a monthly bill for £931, up £264.

Now scroll forward to the final quarter of this year. The future is unpredictable, but on plausible assumptions the CML finds the equivalent payment shock will range from just £30 for a new two-year fix to £161 on the variable rate.

The CML is not saying there will be no effect. Worst hit will be people coming out of five-year fixed rate mortgages this spring, of whom there are 200,000-225,000. Five years ago, remember, Bank rate was 3.5%, the lowest for more than half a century.

These homeowners have, however, seen significant salary hikes over five years, an average net monthly rise in income of £390, the CML reckons. Most should cope. Whether Northern Rock’s mortgage customers will find they have to cope in the arms of another lender is just one of the questions about this unusual nationalisation.

home.economics@sunday-times.co.uk

A good down-to-earth article, which is a bit of a relief, frankly. I don't smell disaster on the horizon because the nation's fundamentals remain in tact. If the Bank regulates interest rates to temper inflation and stimulating growth (as they appear to be doing) then in my view the fundamentals shouldn't change.

I can't see the sense of those many inviting a crash, because all they are doing is courting disaster. That is pretty short-sighted of them. Yes they might be able to buy a house, but then a recession might deprive them of their job, and then where would they be?

As to a continued rise in prices, I say that is healthy in moderation (i.e. 5% a year or so), otherwise you might as well stick the money in an e-saver. The cost of living rises with inflation (RPI etc.) and housing should follow, which it usually does (there will always be pockets of resistance). That is quite apart from the fact that owning is desirable, suggesting it should increase more than the price of eggs.

Tim, Singapore,

Hi David. I enjoy reading your columns every Sunday and appreciate your balanced view. I must admit that I get frustrated reading other views and speculation that Housing is so overvalued in relation to earnings at present. I do appreciate that first time buying and indeed moving up the ladder is difficult and expensive at this time. What is your view on the cost of housing at the moment? Not prices, the cost. I believe that the current stock of housing is of far greater quality and instrinsic value than say 10 or 15 years ago. Just look at the boom in DIY/extensions etc over this time. Also I am fairly familiar with the rise in costs of building materials during the last few years and also rising costs due to increasing building regulations(insulation etc). I do not think that it is reasonable to summarise that 'prices' are at such a high level. I am also intrigued whenever I see average house prices in other countries and they are not so disimilar and do not have the lack of land.

Philip Mournian, Newcastle, Tyne & Wear

So tell me David:

What does Northern Rock mean for the housing market?

Peter Nichol, London,