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'1.2m owners' in negative equity Negative equity stops home moves
(20 minutes later)
More than one million homeowners are thought to be in negative equity because of falling house prices, the Council of Mortgage Lenders (CML) says. Falling house prices mean that two million households have either negative equity, or too little equity to finance a house move, lenders have said.
The drop in property values left about 900,000 people with homes valued at less than their mortgage debt at the end of 2008, its research found. Negative equity is the situation where someone's house has become worth less than their mortgage.
But the CML warned the number may have risen to 1.18m by the end of February. Research by the Council of Mortgage Lenders (CML) said the problem would restrict the number of home sales.
It found the worst hit area was north-east England, while East Anglia and Scotland remained relatively unscathed. But it said two thirds of the 900,000 homes in negative equity had only a modest shortfall of less than 10%.
Sitting tight and building up savings or overpaying on the mortgage are the strategies most borrowers are likely to adopt Bob Pannell Council of Mortgage Lenders That equated to an average of about £6,000 for first-time buyers in that situation, and £8,000 for the other home owners.
The report by James Tatch, senior statistician at the CML, suggested that about two-thirds of those currently facing negative equity faced only modest shortfalls. This amounted to about £6,000 for first-time buyers and £8,000 for other homeowners. "Although negative equity has resurfaced as house prices have fallen, one big difference from the early 1990s downturn is that it is less concentrated among young, first-time buyers, and more evenly spread across wider age groups and those at different points on the housing ladder," said Bob Pannell, head of research at the CML.
However, those who took out mortgages in the second and third quarters of 2007 when house prices were at their peak, were most likely to have been affected badly, it said. "Negative equity will contribute to subdued property turnover, but otherwise should have few adverse effects for the majority of households affected," he added.
The CML report warned that further falls in the value of property were expected. Small deposits
This would take the number of households in negative equity closer to the 1.5 million who found themselves in the same position at the depth of the last housing market recession in 1993. With lenders still restricting their lending because of a shortage of mortgage funds, few are currently prepared to accept a deposit of only10% from anyone buying a house.
'Erosion of equity' Negative equity... only surfaces as a problem if households need to move, or are also experiencing repayment difficulties CML
The CML study also found almost one in 10 (9.2%) of homeowners in the North was in negative equity, while East Anglia remained relatively unaffected (0.9%). Recent figures from the financial information service Moneyfacts showed that there were currently only106 mortgage deals requiring a deposit of 10% or less, while more than two thirds of the 1,485 deals available asked customers to put up a deposit of at least 25%.
Scotland has also escaped the worst, with 1% suffering. The impact is that even people who still have some limited equity in their homes, but less than 10%, are unlikely to be able to move.
Meanwhile, the equity of 565,000 UK mortgage holders had dropped below a 5% deposit on an average priced house in their region, the study said. The CML estimated that there are about 600,000 mortgage holders who have less than 5% equity in their homes, plus another 500,000 whose equity would amount to a deposit of more than 5% but still less than 10%.
This "erosion of equity has significantly weakened the ability of homeowners to move", it added. Thus about two million homeowners in total could not raise a 10% deposit for a new mortgage simply by selling their current homes.
Bob Pannell, CML head of research, said negative equity would slow down sales, but should have few other adverse effects for the majority of households. 1990s comparison
"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," he said. The CML carried out its research by looking at data supplied by its members.
"Otherwise, sitting tight and building up savings or overpaying on the mortgage are the strategies most borrowers are likely to adopt." With house prices dropping by about 18% since the middle of 2007, the fall in prices has already outstripped the national price drop experienced during the early 1990s house price crash.
But the 900,000 estimated to be in negative equity now are fewer in number than the 1.5 million estimated to have been in this position more than a decade and a half ago.
Of the households currently in negative equity, about 270,000 have a shortfall of between 10% and 20%, and about 30,000 have a shortfall of 20% or more.
In those most extreme cases their negative equity amounts to an average £28,000 for first-time buyers and £37,000 for other home owners.
Despite this, the CML argues that it is myth that there is a strong link between negative equity and mortgage repayment problems.
"Payment problems are typically associated with unexpected spending commitments, reduced income and changes in household circumstances," the CML said.
"Negative equity, on the other hand, only surfaces as a problem if households need to move, or are also experiencing repayment difficulties," it added.
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