House-price slump 'a threat to £24bn repayment by Rock'

A slump in house prices could "seriously" affect Northern Rock's plans to repay the £24 billion it owes the Bank of England, chairman Ron Sandler admitted today.

With many commentators, and the Government, predicting that house prices will fall by about 10% this year, Sandler's comments to the Treasury Select Committee seemed designed to prepare for the possibility of disappointment.

"If house prices were to decline 5%, 10% or 15%, that would seriously impede fulfilling the plan," he said. "I can't give you a single figure on which it would fall over."

Northern Rock says it will still repay the money even if a major recession hits, but concedes that it could take longer than planned.

Chief financial officer Ann Godbehere says the bank's model for repayment had been stress-tested against the 1992 recession, when mortgage borrowing rates rocketed to 15% and house prices collapsed.

The current plan sees Northern cutting its balance sheet in half to £50 billion by 2011 with the loan repaid by the end of 2010. Mortgage customers are being encouraged to shift elsewhere, with "most" of them able to get new deals, says the bank.

Sandler claims Northern will move into profit after 2011.

UK house prices fell 0.9% in April alone. Housing Minister Caroline Flint told Cabinet colleagues that house prices will fall by between 5% and 10% this year "at best".

The Government nationalised Northern Rock after the disastrous run on the bank last September. This infuriated shareholders, whose investments have been wiped out.

Two of the biggest Northern Rock shareholders, RAB Capital and SRM, are pressing ahead with legal action.