Northern Rock’s management and shareholders are among the most prominent victims of the credit crunch. Now its mortgage borrowers will feel the full force of the storm.
To shrink Rock’s balance sheet in order to pay off taxpayers, executive chairman Ron Sandler plans to redeem much of the loan book over the next three years, which will involve referring customers to other lenders when they reach the end of their deals. Unfortunately, Sandler is “turfing out 400,000 customers who will need new mortgages just as the supply of credit is falling and its price rising”, as Damian Reece noted in The Daily Telegraph.
The mortgage crunch
Thanks to gummed-up wholesale markets amid worries over solvency, banks are clamping down on lending, which has led to a mortgage crunch. The rate on the average two-year fixed rate deal has climbed to 6.29% from 5.15% a fortnight ago. NatWest and RBS have just become the first banks this year to raise their variable rates for existing customers, while First Direct has suspended new lending entirely. The overall number of mortgages available has slumped from about 15,000 to 5,500 since last summer, according to Moneyfacts. “There are too many borrowers chasing too few deals,” said Melanie Bean of Savills.
So the outlook is darkening for the housing market. Mortgage approvals for new house purchase slipped to 73,000 in February, not far off the low in the early 1990s crash of 65,000, noted Capital Economics, and ever tighter credit points to further falls. The housing downturn “is becoming well-entrenched”; a fall of 25% by mid-2010 looks “entirely plausible”, said the consultancy’s Ed Stansfield. Last week Nationwide reported a fifth successive month of falling prices and annual growth of just 1.1%, a 12-year low. The latest Land Registry report reveals the biggest monthly slide in London prices in two years as the credit crunch hit City demand.
What next?
Given all this bad news, it’s hardly surprising that consumer confidence has slumped to a 15-year low and spending growth in the fourth quarter of last year fell to 0.1% from 0.8% in the previous three months. Households owe 175% of their disposable incomes (more than Americans), have scant savings and are grappling with the highest debt service costs since 1992.
They are likely to retrench further as house prices slide since they will feel less wealthy and less keen to tap their houses for cash; home equity withdrawal slid sharply in the fourth quarter. In short, the UK looks on track for a US-style “sharp housing-induced consumer slowdown”, said Capital Economics – with a “not insignificant chance” of an “outright recession”.