Date:27 June 2009 I Comments: 6 I Views:17,329

Negative equity is already playing it’s part in stifling the property market and it is set to make matters worse.

If prices do drop by another 40% (according to MoneyWeek) or more, over the next few years the number of people finding themselves in negative equity is likely to increase substantially.

The actual number of homeowners facing the prospect of negative equity is difficult to quantify because there is limited and conflicting data available.

According to the Bank of England between 7% and 11% of UK homeowners are now in negative equity a recent report suggests this equates to between 700,000 and 1,100,000 people.

If 700,000 is 7% that report suggests there are 10,000,000 homeowners in the UK.

But according to the Telegraph in 2008 the figure was closer to 14,500,000 and I’m pretty sure 4.5million people haven’t lost or sold their houses in the last year. Unless nearly 30% of all UK homeowners own their property outright?

7% to 11% of 14,500,000 is 1,015,000 and 1,595,000 respectively which is between 315,000 and 495,000 more people in negative equity than the Bank of England suggests.

The ‘NMG Research Survey’ commissioned by the Bank of England and carried out in October 2008 on a sample of just 1000 people forms the basis of the recent report and the report also suggests many of the people surveyed probably overstated the value of their homes.

This means the real number of people either in or facing negative equity, is probably much higher.

According to FSA data used in the report, approximately 75% of all homeowners have 25% equity.

That means 25% of homeowners have less than 25% equity.

That means if house prices drop by another 25% then 25% of all homeowners will be in negative equity.

If there are 14.5 Million homeowners in the UK then the number of people in negative equity will reach a staggering 3,500,000.

But house prices could drop another 40%.

The MoneyWeek article refers to affordability as the main contributor to the potential decline and compares the events of past crashes to predict a 40% drop.

The Bank of England report has another interesting graph showing Nominal House Prices and Real House Prices with the peak of 2007 as the 100% mark. A simple extrapolation of the Real House Prices suggests a correction being approximately 20% lower than the current point (from peak, or 25% from the current level) but as all past crashes have shown, the actual bottoming out occurs well below the target.

So a drop of 30% – 40% more is not unrealistic.

If 3,500,000 homeowners will be in negative equity if house prices drop 25%, how many will be if they drop by 40% or more?

Data from Mortgages.co.uk suggests the average mortgage size in 06 – 07 was approximately £138,000 which by now on a repayment basis could put the average around £135,000 (roughly) and the house price average is now down to approx £150,000.

That actually puts the average Loan to Value at 90%!!

I think a recent survey of more than 1000 people might help to shed some light on that!

Take the survey: What’s your Loan to Value?

 

Category: Mortgages

Comments

  1. James

    The quicker they do drop back down to affordable levels, which as your data suggests could well be 60% + from peak, [as I and many others have been saying for years now!!]
    The better for the British economy, ALL Industry, FTB, young people, the housing market, [Quicker they fall, faster they can start to rise again]
    But for politicial reasons that absolute B@@@@@@ Gordon Brown and the Labour party are keeping the UK artificially inflated, in a desperate attempt to remain in power, and damaging all of us, some of us, even more than they already have done.

    Please Please Please Your Majesty, call a vote of no confidence in the parasitical cabinet, who should be sent to the tower, for the rest of their natural lives.

  2. James, why would it be good if prices rose quickly again after crashing? The whole problem began with an over inflated market. The last thing we want is prices going crazy again. Keep prices stable, with very, very steady gains in line with inflation and then many more people will be able to get on the property ladder, rather than a lucky few.

  3. Some of us have been through this before in the 1990’s. I got out of negative equity by aggresively overpaying my mortgage so that the loan outstanding was always lower than the value of the house. It had the side effect of saving me thousands in interest payments. Eventually house prices then rose again (as they always do), so I was able to sell for more than I had purchased the property for. So a double benefit for those who are prepared to be patient.

    James and Helen – the number of owner-occupiers in the UK already stand at over 70% of the adult population. I’m not sure how “many more” people will be able to get on the property ladder without getting students aged 18 to buy!!! It’s actually desirable that people in their 20’s rent – their careers are not set, they may need to be mobile and relocate. Settle down in a house in your late 20’s/early 30’s. This idea that you should be able to buy a house at age 21 is madness. Those who believe that it was possible in the past are fantasising – even as late as the 1980’s owner occupation was only in the 60 percents, and was about 40% in the 1950’s and 60’s.

  4. Brian

    The 7% to 11% figure takes the assumption that there are 10,000,000 homeowners with mortgages. So yes, 30% of the UK owns their homes outright. We know that according to the Department for Communities and Local Government a little over 8,000,000 had mortgages as of February 2008, the lowest level for 20 years. Instead of 4.5 million people selling their home, a little under two million took on new mortgages.

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