About a million homeowners are in negative equity, a report from the Council of Mortgage Lenders estimates. The result could be a brake on the housing market not just for months ahead, but perhaps for a year or more. It is also a psychological hammer blow to homeowners' sense of economic wellbeing.
A matter of interpretation
Just how many homeowners are in negative equity depends on what assumptions are made about the current value of homes and on calculations on the size of outstanding loans. The CML believes that using Halifax's index of house prices, about 870,000 borrowers are in negative equity. But if the more downbeat Nationwide index is believed, nearly 1.2 million homeowners owe more on their mortgages than the value of their homes.
And, worse still, a recent GfK NOP opinion poll - based on information supplied by the interviewees - suggests that 3.8 million homeowners are either in negative equity, or are on the edge of being so. A further 1.2 million people could enter negative equity territory this year if there are further falls in home values, says GfK.
And the good news
An underlying message of the CML's report is 'don't panic'. It stresses that negative equity does not, in itself, damage a borrower's ability to repay their loan. Nor is negative equity, as yet, as damaging as it was in the early 1990s. Then, the size of homeowners' negative equity was often very substantial and was a blight, in particular, on young borrowers who had recently bought their first homes.
Now, according to the CML's calculations, fewer homeowners are affected and negative equity is spread more generally across the house buying population, rather than just being a burden on the young. For two in three of those in negative equity, its size is less than £10,000 - giving them reasonable hope of moving out of negative equity, assuming the house market begins to recover later this year or next. Very few people - about 3% of borrowers - have negative equity of more than 20% of their home values.
The average size of negative equity is £6,000 for first time buyers and £8,000 for those who took mortgages to move home. The CML study did not look at the effect on the buy-to-let market, many participants in which are also in negative equity. About a third of private landlords financed home purchases with mortgages.
Regional imbalance
The impact of negative equity varies significantly across the country. House prices boomed most dramatically in Northern Ireland, with the result that it is particularly vulnerable to negative equity. But Northern England and Wales are suffering more than average, too. The Northern England region has the highest proportion of homeowners in negative equity, at 9.2%.
Psychological impact
But even if most homeowners are not suffering negative equity, it damages both those directly affected and the wider property market. It discourages people from selling their homes as this would crystallise their losses - even if they have the chance to buy another property at a good price. In the 1990s homeowners were prepared to hang onto homes for several years longer than they wanted to, in order to sell at a price higher than they owed on their mortgage.
There are also practical difficulties about financing a home purchase when a borrower makes a loss on their previous transaction. In current market conditions, many purchasers will be expected to provide at least 10% of the equity in their new home - which is often impossible for people who are now in negative equity.
Loan consolidation may be out
Consumers who have bought excessively in the expectation they could later consolidate borrowings by remortgaging their properties or by taking out a second, secured, loan now risk having to sell their homes at a low market value.
Negative equity is also a blow to people nearing retirement, who assumed that escalating house prices would act as a pension. And even more people will be affected by the psychological damage caused by the simple fact that they feel poorer when they learn that their home is now worth less than their mortgage.
Continuing damage
Negative equity will damage the housing market, but borrowers should not overestimate its impact, says Bob Pannell, head of research, at CML. "Negative equity will contribute to subdued property turnover, but otherwise should have few adverse effects for the majority of households affected," he says.
"Where people need to move house for job or other priority reasons, lenders can often be flexible to existing borrowers with low or negative equity, as long as their financial position is sound and they have a good payment track record. Otherwise, sitting tight and building up savings or overpaying on the mortgage are the strategies most borrowers are likely to adopt. It should be easier for households to rebuild their equity position than in the early 1990s, as low interest rates on their mortgage can help them to save or overpay more quickly."
But Andy Thwaites, of GfK suggests the situation is more damaging. "The shift to negative equity has the potential to be a mammoth welfare disaster for the nation, particularly when so much of the population has recently relied on the capital appreciation in their home to supplement their lifestyle, consolidate debts and fund retirement," says Thwaites. "The reality is that if there are further job cuts, the problem will become significantly worse."
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related links
- Council of Mortgage Lenders
a recent GfK NOP opinion poll - based on information supplied by the interviewees - suggests that 3.8 million homeowners are either in negative equity, or are on the edge of being so.
