Northern Rock’s revival won’t kickstart the property market

Fed up with the credit crunch? Unable to get a mortgage?

Fear not. The bank that was arguably once the country's most reckless lender is back from the dead and being unleashed on the public once again. Northern Rock was the first casualty of the British banking sector. Now we're getting a taste of what the future might hold for the others.

It seems that slashing interest rates, printing money, and guaranteeing bad debts with public money isn't enough. The only thing that can sort this credit crisis out is direct intervention with the Government using its new banking arm to increase lending.

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But will it work?

It's comeback time for Northern Rock

Northern Rock has repaid a big chunk of its debt to the taxpayer more quickly than expected (the outstanding debt it has to repay to the Government has fallen to £8.9bn from £26.9bn). So the Government has now decided that there's room for the Newcastle-based bank to crank up lending again, to the tune of £14bn. The bank may have made a £1.4bn loss in 2008, but that's practically a rounding error these days.

And this won't be the old Northern Rock, of 125% Together' mortgage fame. No this will be the new, responsible Northern Rock which will lend sensibly.

Chancellor Alistair Darling summed it up yesterday, when he argued that the bank would be allowed to go to 90% loan-to-value but no further. "I have made it clear, and the Prime Minister made it clear at the weekend that I really have severe doubts about the 100%-plus loans that were made available. In this day and age, that is ridiculous."

You have to wonder what on earth he means by "in this day and age"? Sure, lending 100% of a property's value when house prices are plunging at the fastest rate on record would clearly be stupid. But was there ever a period in history at which 100%-plus mortgages made perfect sense?

Northern Rock's revival is not the start of the property rebound

Anyway, getting down to the details, Northern Rock is expected to write £5bn in new mortgages this year, and up to a further £9bn in 2010. That doesn't look like much when you compare it to gross mortgage lending last year, of £258bn. But actually, as Capital Economics points out, if you compare it to net lending last year which came in at just £40bn then £5bn is a not-insubstantial boost. "Ironically, having spent 2008 aggressively shrinking its loan book, 2009 and 2010 could see Northern Rock regain its place as one of the largest lenders in the UK."

So, is this the start of the property rebound? I think you can guess the answer no.

For one thing, if you can only lend 90% of a property's value, then that's still going to be pretty restrictive, compared to the cheap money glory days of 2007. Unless of course, there's a six times salary mortgage multiple attached to that but presumably the new and improved Northern Rock won't be doing anything so stupid this time around.

Also, we're no longer in the boom times. We're now in a rather nasty recession. With job losses rising, and debts turning sour by the minute, lenders have to be a lot more picky than they were previously.

That goes doubly for Northern Rock, which had better watch its bad debt levels. After spending 2008 offloading all its best customers (those who were able to get mortgages elsewhere), the quality of its loan portfolio seems to have fallen somewhat. Indeed, accounts more than three months in arrears represented 2.92% of the loan book at the end of 2008, from 1.87% three months earlier. That's a massive 56% jump in a very short space of time.

House prices are still nowhere near the bottom

Then there's the other issue we regularly point out here at MoneyWeek you can take a horse to water, but you can't make it drink. Similarly, you can thrust as much cheap money at a consumer as you like, but that won't necessarily make them borrow more.

There's still the occasional person who says that renting is dead money (usually quoted somewhere in a Sunday property supplement), but they are growing fewer and further between. No one has to buy a property, and when prices are tumbling this rapidly, and there are concerns about keeping your job, there's no real incentive to. Northern Rock and any other nationalised banks can offer all the loans they want, but until prices fall to what people regard as reasonable levels, it's unlikely there will be many takers.

So we suspect that house prices will continue to fall for some time. James Ferguson of Pali International gave his latest update on how long he thinks the market will take to recover in a recent edition of MoneyWeek you can read the piece here: Worse to come for property markets on both sides of the Atlantic.

Looking for some good news? Well, the recession isn't bad for everyone. Pawnbroker Albemarle & Bond (LSE:ABM) yesterday reported that half-year profit rose by 19% to £6.2m. The group hiked its interim dividend by 12.5% to 2.25p. We've been keen on the pawnbroking sector for quite some time now and looked at both A&B and its counterpart, H&T (LSE:HAT) in last week's cover story on stocks that can beat the recession.

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