Negative Equity - Fun With Numbers

From City AM:

CLOSE to half a million British households could be facing negative equity, according to survey released today by the Bank of England...

And more people could fall into negative equity if house prices drop further. Close to one in five mortgage holders have debts exceeding 75 per cent of the value of their properties, “not much changed” from last year, the report says.

Ho hum.

Let's ignore everybody with a loan-to-value ('LTV') of 75% or less and assume that one-fifth of borrowers have a mortgage of £180,000 on a house currently worth £200,000 (i.e. 90% LTV, the average of all those people with LTV between 75% and 105%).

If house prices were to fall by a quarter (similar to the fall post-1989), the average nequity of that one fifth of borrowers will be £30,000 (£180,000 mortgage minus house value £150,000).

Multiply £30,000 by two million borrowers and we have a potential shortfall of £60 billion. Let's assume half of those in nequity now default; go bankrupt; AND have house repossessed and dumped at the new lower value.

The total loss to UK banks would be a laughable £30 billion (£60 billion x half), or less than half-a-per cent of what UK banks claim to have as total assets (about £7,000 billion).

In truth, UK banks wildly overstate their assets and liabilities to make themselves look 'too big to fail', so in truth that £30 billion loss would be slightly more than one per cent of total UK bank assets (which are primarily mortgages secured on land and buildings), but hey, it's not going to bring the country to its knees or anything.