If you take the distribution of loan-to-value figures from Chart 1.9 to The Bank of England's latest Financial Stability Report, then, subject to a few assumptions*, the cumulative total number of households in neqative equity for each 5% fall in house prices is as follows:
* The assumptions are: there are 11.8 million outstanding mortgages; mortgagors have no other financial assets or liabilities; mortgagors have kept up with normal repayments; and that the BoE's figures are as at December 2007 (a few months before the report was published). Further, it ignores BTLers (who have more than one mortgage-per-household and bought at recent peaks), which would reduce the 'number of households' slightly.
The Halifax House Price Index for June 2008 showed that house prices had fallen by an average of nearly ten per cent since December 2007, in other words, there were 200,000-odd households in NequityTM a month ago. If prices slide another ten per cent by the end of 2008, there will be 650,000 households in NequityTM.
According to last Saturday's Times, "Morgan Stanley, the investment bank, said that if prices fall by 25 per cent in the next two years, more than two million - or one in six borrowers - would be in negative equity.", which ties in nicely with the table above - we're already down ten per cent, so another twenty five per cent gets us to thirty five per cent in total, reading across from thirty five per cent gives us the grand total of 2,179,140 households in NequityTM by the end of the year.
Wednesday, 23 July 2008
Mark's negative-equity-o-meter
Thanks to Alice Cook for the steer.
Subscribe to:
Post Comments (Atom)
9 comments:
Negative equity is only a problem if you are forced to sell.
The real problem that needs managing is the belief that buying a house is a one way trip to wealth. That is the real problem we are facing- the kick in the balls that people feel when they realise that there is no panacea to the daily grind unless you are very, very, lucky.
Unfortunately property speculation has become a way of life and our politicians are all too happy to fuel the misplaced belief that all you have to do is borrow some money, buy a property and you will automatically get rich.
Whilst I'm still not sure about your hobby horse of land value tax I am coming round to it.
PS, I reckon I am now living through my 5th property correction - we just don't learn, do we?
PPS I have been a house owner through every one and have felt the pain that many people are just about to go through.
The 'belief' of which you speak has been stoked by Tory and Labour gummints since the early 1970s - it's easy blowing a bubble to maintain the charade, but it always goes *pop* in the end.
I'm working on a thesis that the period of low and stable house prices in the 1950s and 1960s came from 2 things:
1. We had Schedule A taxation (until 1960 at least) and Domestic Rates, which, taken together amounted to a Progressive Property Tax (similar to LVT), and
2. We built 400,000 houses a year (with a smaller and much poorer population) rather than 100,000 or 200,000 as now.
LVT is an interesting quirk, it is the perfect tax, and neither the Tories nor Labour will ever introduce it, that much is perfectly clear to me.
I'm curious as to why negative equity is presented as such a big problem for an individual*.
For instance if I had bought a house with 25% cash down I would consider the first 25% loss of value to be catastrophic as it would wipe out my equity. At that point any remaining falls (putting me into -ve equity) are surely the banks problem more than mine? Am I wrong?
* assume the individual does not want to move and has no other assets. Then you have a straight up choice between paying the mortgage or throwing the keys back.
It is partly psychological.
As to 'handing back the keys' the law is different in the UK and the USA. In the UK, broadly speaking, the bank can continue to hound you for the shortfall.
But nonetheless, once we get to the 'handing back the keys' stage, house prices (and bank share prices) will go into freefall (which is A Good Thing, from my purely personal point of view).
Perhaps I'm mistaken, if you take the "hand back the keys" option and declare bankruptcy are you still personally liable for the nequity once you are discharged from bankruptcy?
BQ, in that case, certainly not. I doubt, however, that millions of people will declare themselves bankrupt over the next few years. The bank usually does some sort of IVA type compromise.
The worst thing to do is hand the keys back or just let the bank take possession. They will sell for whatever they can get and, as Mark says, chase the you for the debt.
I have always been curious about the US system where it becomes the banks problem. Why do they let all those properties go empty and degenerate into ghettos? Surely it would be in their interest to convert the occupiers to tenants? At least the property maintains some value for later sale and they get some money.
GS, normally, they leave the properties empty and allow them to become ghettoes, but I did read an article somewhere recently that said that some more clued up banks allowed the former owners to remain living there - it reduces security costs and ghettoisation as well as being less traumatic for the borrower.
negative equity is a problem for 2 reasons
Your mortgage deal is based on the current loan to value of the mortgage to property.
So once your tracker/fixed rate ends you will go on to the SVR with no chance of remortgaging. The SVR is likely around 1-2% higher than any deal.
secondly - you cannot hand in your keys without being pursued for the negative equity sum. If you have equity you can sell and rent.
Post a Comment