When will the rocky market stabilise?

On the 13th September, 2007, the Bank of England granted emergency lending facilities to the Northern Rock and a statement was issued by the Bank of England, The Treasury and the Financial Services Authority (FSA) stressing that they were prepared to support Northern Rock as they regarded the Bank as solvent and holding a good quality loan book. 

Northern Rock (Britain’s fifth largest mortgage lender) has a very small deposit base compared to the size of its mortgage portfolio. However, the current “credit crunch” has made it extremely difficult and expensive for Northern Rock to obtain the funds that it needs from the money market to finance its mortgage activities, forcing the Bank to go to the Bank of England as lender of last resort for emergency funding facilities. Its share price has plunged and media coverage reported large queues of savers outsides its branches looking to withdraw their deposits. 

Other media reports have fuelled doubts of uncertainly about the general health of other UK financial institutions.  Indeed two other financial institutions, the Alliance & Leicester and Bradford & Bingley saw their share values plunge at the height of the Northern Rock crisis.  Alliance & Leicester issued a statement stating that its business model is very different to that of Northern Rock, that it is well capitalised and it does not need help. 

All of the above factors will have undoubtedly dented confidence within the market place.  Any hit to confidence is likely to increase the risk that consumers will become markedly more cautious in their spending over the coming months. Glasgow and Edinburgh have seen recently small falls reported in the average house price for the first time in many years.  The Northern Rock problem and media coverage also increases the risk that the housing market slows down, that now appears to be developing could become markedly more pronounced.

What happens next with mortgage rates? Some commentators predict that these will fall whilst others are indicating rises are more likely.  I expect a slow down in house price growth to become more marked over the coming months but still expect the sector to ultimately achieve a soft landing with house prices settling into an overall extended period of very modest year on year growth.

Only time will tell!