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?