Northern Rock, and why this will be the start of the great House Price Crash.

[Rave]

I'm sure anyone who's seen any news in the last few days will be aware that there's been a run on Northern Rock (hereafter NR).

http://news.independent.co.uk/busine...cle2970767.ece

The wiser folk on www.housepricecrash.co.uk have been warning about NR for months. So whenever anyone claims- as NR's Chief Exectutive seems to be doing- that they couldn't have foreseen what would happen, don't believe them. They borrowed too much money at cheap short term rates, and lent out too much for the long term, to people who are less likely than average to be able to repay it in full. It was always a recipe for disaster.

If you're one of the unfortunate people who has yet to retrieve their savings from NR, remember that you can get compensation from the FSCS if they do go down the tube. So you might not have to panic depending on how much you've got in there.

Anyway, I've been banging on about the forthcoming house price crash for a long time, and have been generally laughed at. I will freely admit that I called it too early- although the national averages for the last year or so have been heavily distorted by the top end of the London market going mental- fuelled, amongst other things, by massive city bonuses.

Well, they're not going to be so massive next year- this credit crunch really isn't helping profits . The credit crunch isn't really helping the banks to keep providing cheap mortgages either- either to first time buyers, or to people who need to remortgage because their fixed rate is coming to an end. We're already seeing a big rise in mortgage arrears and reposession proceedings- watch for many more when people who are already stretched find their mortgage payments jumping 20% in a month.

So, suddenly there are going to be more people needing to sell- and at the same time, there are going to be very vew people who can afford to pay current asking prices (because banks will soon stop lending people 5x their salary at 100% LTV). When that happens, a lot of sellers are going to have no choice but to drop their asking prices, because if they don't sell they are likely to be reposessed. And, of course, when those sales show up in the statistics, the statistics will show that house prices are falling. Once they start falling, they'll keep falling, like they did for 7 years from 1989 to 1996. The action's already hotting up in Ireland:

http://homepage.ntlworld.com/richard...ay3/violin.gif

Like last time, this is likely to cause a recession. IMO it'll be a severe one. Now of course i'm mainly posting this thread so that when all my predictions come true in a year or two I can point to it and say "I TOLD YOU SO". However, I would also like to point out that there are things you can do to protect yourself. If you're thinking of buying property, don't. If you're thinking of selling property, do, as quickly as possible. Don't be caught chasing the market down. If you're debating whether to save some money (or pay off your debts), or keep on spending on cars, consoles, tellys, phones, ipods etc., well my personal advice would be to save- and with NSI, not with banks or building societies, because NR may only be the first of several to take massive and possibly fatal hits.

If you've got the chance to get yourself a more "recession-proof" job, then I would look carefully at it. And if you've got space to stash away some candles, fuel and tinned food, well, maybe I'm getting a bit overexcited.

[Funkstar]

That all makes sense. I'm not saying you are completely correct, but i think it is a sound argument.

I've been saying for a while now that the current market is unsustainable. I just feel bad for the few people i know that have just bought places.

From a purely selfish point of view, I'm hoping for a price crunch. Percentage wise, my one bedroom flat might drop a lot of value, but in cash terms, this should be a lot less than bigger properties which i want to buy. And with the size of my mortgage, i should be just fine.

[Gerrard]

I consider myself in a very good vantage point at the moment. My job is secure and recession proof (there's more than enough people wanting redundancy to mean that if you want the job, you keep it), and as I only pay peanuts in rent, I'm not paying losing out by waiting to see what happens.

Personally, I'm hoping for a crash.

[IBM]

I'm just hoping that the financial support of the BOE will help Northern Rock ride the wave, and find it's feet....although probably with a lot less customers and severely reduced profits....this will then lead to mortage multiplier caps, and increased mortage rates, which will help to correct the housing market without a crash.

After all, as far as the BOE is concerned, bailing out NR might cost billions short term, but a full blown recession will cost the economy trillions. Makes sense to do all it can to help NR survive.

Personally I blame the media.

[wombar]

I'd have to say that I agree with Rave on this, I've got a few friends in various areas of the finance industry and the general feeling is that there are some VERY tough times aheads. Budgets are being slashed, companies who used to loan out money are shutting up shop and the outcast for the year ahead isn't looking great.

I'm still not sure whether we're going to see a crash in house prices, but they are going to start coming down in the next 6 months (it's already started in many areas btw) due to a number of factors. It would be nice to have a slow decline rather than a sharp correction to give people a chance to get themselves sorted, but I'm not sure that's an option at this stage in the game. There's been too much irresponsible lending and the house market can't sustain this level of growth and ridiculous prices. FTB'ers have been walking away in droves because they simply can't afford the mortgage for an "executive" flat which is poorly built and only takes 3/4 size furniture. Without people getting on at the bottom of the market, we've got a big problem.

There are still an awful lot of people with their heads stuck in the sand, I have a few friends who despite having to lower their flat prices (because they just aren't selling) won't believe that prices will EVER go down. There are going to be an awful lot of people who get burnt this time around and whilst I wouldn't wish it on anyone, you'd have to be an idiot to believe that interest rates were never going to go up again and people can just borrow more from the bank.

There's some tough times ahead, good luck everyone.

[Brucelles]

Yeah Rave, That looks about what our economic unit thinks.

I live in a house paid for by the Belgian government, so I'm untouchable there. The good news is that my deposit rate has rocketted, so that I'm making sensible money on interest.

The only thing about Rave's explanation is that it is a little introspective. You have to remember that this crash is driven by America, and until America pulls out it will affect all of us. That idiot Bush has taken America from having a huge budget surplus to a massive deficit, the biggest in history, effectively wiping out productivity for the next 5 years. Currently the increases in national debt outweigh GDP by a factor of 5.

America is a massive debtor now, owing $48 trillion, of which $10 trillion is government debt. If you look at interest rates you will notice that servicing that debt must be costing about 2.5 trillion to service at 5%. If rates go up to 6% (which they have to, barring a massive intervention) the additional cost to America would be 480 billion per year. With a GDP of 13 trillion that's not going to reduce the debt.

So the USA will need to borrow more, but their currency is devaluing daily. No-one in their right mind is going to hang onto a decreasing asset without some kind of incentive, so we (Dollar debt owners) have started to bail out, which costs the USA even more, as they have to accept their paper back and give us our real money. So they will raise interest rates in order to attract the loans they need, and that will hurt them even more. Unless the US government takes some kind of responsible action there will be a recession, perhaps even a crash and a depression. One hopes not, but the Bush regime has shown itself to be stupid, selfish and greedy so far; can we really expect them to change?

Esteemed Economist Ludwig von Mises stated the endgame brought on by reckless expansion of credit (debt): "There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved."

In other words does America take a kick in the balls now and get it over with, or will it wait for the axeman?

[YorkieBen]

NR wont go under, its still profitable. It will get bought out though. If one high street bank was about to go bust both the BoE and the other high street banks would bail them out because of the general harm it would do to banking and the economy in general (imo)

I agree on house prices though, they are unsustainable at the moment. I dont think the recession will be as last time but we will see

[Saracen]

I'm with YorkieBen.

Northern Rock is not, by a very large margin, insolvent. It has two problems - one is short-term liquidity due to the changes in LIBOR and the underlying reluctance of banks to lend inter-bank at all, and the other is panic .... a sheer lack of confidence. There's no rational financial reason, given the financials, for people to be panicking to pull deposits of out NR.

But, if I was an NR customer, I'd be pulling deposits out too. Why? Because while the financial side of things might not take it down, the panic might, and whatever the extent of or reason for the risk, it's not a risk if you don't have money in there.

And if there's a threat to the housing market, it's that the house ('scuse the pun) house of cards that is the housing market is entirely predicated on confidence. People take out mortgages, stick debt on the credit card and get loans to buy consumer toys entirely on the basis that the future will be like the past, and that that means they can afford the borrowing. Unfortunately, the future isn't always like the past. And once you've got debt up the wazoo and you're neck stuck way out, it's a bit unnerving to see the ground shifting underneath you.

If, repeat IF confidence collapses, it'll stop people spending, and that means shops stop selling and that means businesses have to scale back and tighten their belts, and if severe enough, that means a recession in which which people can't afford those loan and credit card repayments and to service their mortgage. And THAT could well trigger a housing collapse. After all, people's confidence rests largely on the ever-increasing value of their house, and that's what underpins the vast debt the UK (and several other countries) are in. Remove the confidence about house prices and they might actually collapse, imply because confidence has gone.

But is the NR run a trigger for that? Maybe. But NR is a very different case to most other banks, and certainly the major ones. The underlying business model is different and it's main reason for the liquidity problem is that it's more dependent on the wholesale money markets for operating capital than those with a high ratio of retail deposits. And some of those with a retail profile are actually increasing their business as a result of the current situation.

It is, in my opinion, still not possible to predict a housing price collapse as imminent. I'm certainly not saying it won't happen, but it is yet FAR from certain. And if it does happen, it's hard to say whether it'll be a painful but moderate readjustment, or the sort of 30-50% reduction lots of people (usually those wanting to get on the ladder) are hoping for. But a warning ... if we do get a collapse of that magnitude, it spells a very dark economic period for nearly everybody.

And don't use the way things worked out last time the house price market collapsed as a guide, because a pot of things, both in the housing market and the overall economy, were VERY different then. It's not the same situation at all.

[Brucelles]

Thank God we have no John Major this time.

It could work well for me as I am looking to buy in France soon, and I could use the reduced competition that this will create. I can also afford to wait for prices to drop, if they start to. I guess we will see what the real story is once it all shakes out. The FTSE looks pretty sad at the moment.

[atmadden]

House prices need to crash to be honest as a first time buyer like myself hasn't a hope in hell of buying anywhere with the prices the way they are.

[kalniel]

First time buyers are in short term hell at the moment - the credit crunch has come before any decrease in house prices. In short, we can't be lent the money now to get on the ladder, where before (with loony loans) we could.

Then it depends how important first time buyers are for the market.. they're useful, but I wonder how much? In the short term this can be solved with shared ownership schemes, which will allow first time buyers back into the market and keep things flowing.

I don't think NR will have any affect though - most of it's money is in the financial market, not people's savings. So they can withdraw all they like and the only affect it'll have is on the share price. That could bring down the markets a bit, and so indirectly have an affect on it's assets, but I think it's a pretty small player in that regard so by itself it's not going to have a majory effect.

Reccession in the US is a bigger threat to NR.

[YorkieBen]

Thank God we have no John Major this time.

It could work well for me as I am looking to buy in France soon, and I could use the reduced competition that this will create. I can also afford to wait for prices to drop, if they start to. I guess we will see what the real story is once it all shakes out. The FTSE looks pretty sad at the moment.

why no John Major?

The FTSE will bounce back like it did a couple of months back (although it is over valued)

[Lucio]

I am personally watching this very very closely, my fiancee and I have our fixed rate due to expire in January and we were planning on financing our wedding by extending the mortgage into the equity in the home. However, given the current state of affairs, I'm not so sure we will be able to do this, or if it'd be wise to do so, given we'd probably need to shift to an interest only option till one of us got a significant pay rise.

The question becomes though, where DO you go to get financial advise without spending a fortune or having someone who'se out to sell you a specific product??

[kalniel]

There's a couple of forums around which will get you non-professional but helpful advice - something like moneysavingexpert or motleyfool would be a good start.

But if you want to be sure and get the best advice, you'll need to find an independant financial advisor, though I'm sure the CAB will also do their best to help for free as well.

[finlay666]

From being at work next to a branch in a small town on Saturday it was terrible, people obviously panicking about the situation, taking their money out, as far as I know that is the worst thing to do.

Queues were stupidly long too

My parents have money invested with them, annoyingly it's the money my rent and student loan savings are in

[kalniel]

Investments *with* them will be fine - might even be very good as people are starting to increase saving rates. Investments *in* them are looking horrendous, but that just means that they'll probably complete a sell out sooner rather than later, meaning it could end up alright in that situation as well

The main people loosing out are those that are paying a penalty for withrawing money before the end of any terms.