Northern Rock loan repayments could be delayed by house price falls
by Kay Murchie
Northern Rock chairman, Ron Sandler, has warned that sharp house price falls could delay its plans to repay the billions of pounds it owes the Bank of England.
Mr Sandler said if house prices were to decline 5%, 10% or 15%, that would seriously impede fulfilling the plan and added I can’t give you a single figure on which it would fall over.
Earlier this week, the Royal Institution of Chartered Surveyors (Rics) said it is optimistic that house prices would fall by only 5% by the end of the 2008. However, many economists believe the drop could be as much as 30%.
Former Lloyds of London boss, Mr Sandler informed MPs that, as things currently stand, the bank will be able to repay the £26.9 billion Bank of England loan by the end of 2010 and expects to repay about £7 billion of the loan by the end of 2008.
He told the Treasury Select Committee that the bank’s recovery plan was challenging in very many respects.
If we were to suffer a significant downturn in this economy, and if that were to lead to levels of unemployment which are significantly higher than those at present I can see that that would place considerable strain on the ability of the company to deliver the plan, said Mr Sandler.
Mr Sandler assured MPs that his plan for Northern Rock had been stress tested against problems in the housing market such as those seen in Britain during the early 1990s.
Newcastle-based Northern Rock was taken into public ownership after the Government rejected takeover bids from the board of Northern Rock and a consortium led by Sir Richard Branson’s Virgin Group.
It has recently been confirmed that shareholders of Northern Rock have commenced legal proceedings against the Government to claim compensation for nationalising the bank as they believed it was still a viable company.
Finally, the bank has commenced talks with staff over plans to axe 2,000 jobs.
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