Lunchtime news Thursday 20th September 2007

Mervyn King, governor of the Bank of England has come under fire from a Treasury select committee for the Bank’s actions in the run up to the Northern Rock crisis and its management since. King blames four pieces of legislation which restricted the bank’s ability to deal with the four-day run on Northern Rock, which cost £2 billion in withdrawals. The Bank of England yesterday decided to pump £10 billion into the money market, just a week after the governor had said it would not. It has also emerged that the Financial Services Authority (FSA) has been monitoring Northern Rock since 9 August after the US Federal Reserve and European Central Bank both injected cash into the banking system.

Despite the extra £10 billion put into the money market, mortgage experts are warning that a quarter of a million homeowners face soaring repayments and possible repossession as rates for sub-prime borrowers in the UK will reach levels of more than 10 per cent when their current deals end. Stricter new borrowing rules will prevent homeowners with the worst credit rates from remortgaging, making them susceptible to more expensive variable rates.

However Abbey, Britain’s third biggest mortgage lender, was accused of fuelling the debt crisis as it launched a new home loan worth up to 125 per cent of the property’s sale price. The loan is structured so that a buyer can borrow 100 per cent of the value of the property, plus a further £25,000, in totally secured loans. It is aimed at first time buyers, but critics have highlighted that borrowers could lose their homes for missing a payment even on the portion of the loan beyond the property’s value. The Abbey defended its decision insisting that it would be useful for buyers who needed extra cash to furnish a property.

Ken Livingstone, Mayor of London, has set out his plans after being passed control of London’s £1 billion housing and planning budget. He announced on Tuesday that he wants to build 50,000 new affordable homes in London over the next three years. To do this it is expected that he will force 50 per cent of all new schemes to be set aside for affordable housing, and will increase the target for social rented housing of three or more bedrooms from 35 to 40 per cent of the overall supply.

House prices across most of Western Europe have stalled or begun to fall as borrowing costs increase and a fear of over supply take their toll, according to research by Knight Frank. The German market has been hardest hit, as an over supply of property has reduced house price inflation to a national average by 6.9 per cent. Globally, house prices rose by 7.8 per cent for the year to June, a slow down from 9 and 9.7 per cent over the previous three quarters – with Brazil, India and China likely to see big rises in the coming year. Latvia lead with house inflation of 37.7 per cent.