Northern Rock dismisses fear of speculative housing bubble

Interest rates could rise by a third and home buyers would still be able to pay back their increasing mortgage debt, the lender Northern Rock said yesterday.

Adam Applegarth, chief executive of Britain's tenth largest bank, declared he was confident that the 15 per cent rise in house prices this year did not constitute a speculative bubble. But he predicted the growth in the housing market would ease gradually in the long term.

"If interest rates were to go above 10 per cent, that might be a bubble, but if they go to 6 per cent, that won't have much impact on whether people can service their loan," Mr Applegarth said.

His views add to those of other mortgage lenders, including Halifax and Nationwide, which believe that the steep rise in house prices is very different from the house price frenzy in the late 1980s.

Mr Applegarth said he and other lenders had honed their criteria for prospective customers so that far fewer defaulted on their loans, saying: "Lessons were learned in the early 1990s so we have not had to tighten our criteria for lending now."

Northern Rock tests whether customers can afford their loans by auditing the state of their finances every month. It has found that despite the surge in high street spending, borrowers are still not showing any more signs of strain than before.

This was even though the bank offers customers loans of up to 125 per cent of the value of the property, which is one of the biggest loans on the market.

However, Mr Applegarth added his voice to the view that property prices are outstripping average earnings so much that they will have to ease.

"If average earnings are increasing by 4.5 per cent to 5 per cent, house prices will have to come down to around that in the long run," he said. He believes there are already signs of a slowdown in hot spots such as central London.

Separately, the latest survey by the website Hometrack, showed prices are continuing to rise strongly, up 7.7 per cent in the first four months of the year.

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