One in seven homeowners face negative equity

geoffky

One in seven homeowners face negative equity

By Chris Giles, Economics Editor
Published: July 31 2008 04:13 | Last updated: July 31 2008 04:13




S&P said properties with negative equity were likely to be worth 8 per cent less than their mortgages on average, with the problem more prevalent in the Midlands and north of England.
“Right now the numbers in negative equity are relatively small – it is the people who took out a 95 per cent mortgage at the peak of house prices – but clearly as house prices decline, more and more people will be dragged into the negative equity net,” said Andy South, the report’s author.
For policymakers, the figures contain both good and bad news. The good news is the mortgage market is far more resilient to equivalent house price falls than it was in the early 1990s, or than research based on less complete data has suggested hitherto. At the nadir of the housing slump in 1993, when prices fell by less than 12 per cent, 1.8m households, mostly in the south, were in negative equity.
The bad news is that house prices appear to be falling much faster in cash terms than in the early 1990s, suggesting that a similar proportion could end up with negative equity.
The new figures will be taken seriously because they are the first to be based on a large sample of existing mortgages. S&P researchers used a sample of more than 2m loans in securitisation vehicles that it was asked to rate. Most other recent estimates of negative equity, including a study by the Financial Times which arrived at very similar results, have relied on data for mortgages at the time they were originated, not a sample of outstanding loans.
Most homeowners are extremely safe, the S&P data show, with the average mortgage only 54 per cent of the value of the home. But buy-to-let mortgages were clustered, with average loan- to-value ratios of around 80 per cent. If house prices fell by around 20 per cent from their peak, Mr South said, negative equity would hit “suddenly a large proportion of buy-to-let properties”.
Capital Economics, a consultancy with a record of pessimistic predictions, on Wednesday forecast that house prices would drop 35 per cent from peak to trough. Their prediction came as consumer confidence on the GfK researchers measure dropped to an all-time low.



http://www.ft.com/cms/s/0/61ce2396-5e8d-11dd-b354-000077b07658.html

Premier_2

I read this yesterday, and whilst I cannot argue with the basis, I do think it's basic scaremongering.

It assumes prices are going to fall by 20% (without any evidence to justify this assumption) and says that if they do, some people will have negative equity. Does it really need S&P to tell us that? With deposits of between 5-10%, then if prices fall by more this amount, those people will be in negative equity. Simple.

The problem as I see it is, the report has no basis whatsoever on which to base the assumption prices will fall by 20%

Still - makes story on a no news day.


This bit is clearly wrong:

"The bad news is that house prices appear to be falling much faster in cash terms than in the early 1990s"

According to the Nationwide, house prices are falling slower now than they were in 1990 (see thread on Nationwide report today). If you take Land Registry figures, it shows a price increase (albeit a very small one) over the 12 month period ending June 2008

tomstickland

It appears to me as a clear, fact based report.
It clearly says "The ratings agency estimates that house prices, already 7 per cent below their peak, will fall a further 17 per cent, increasing the numbers in negative equity from just 70,000 households today to 1.7m, or 14 per cent of borrowers."
It's not scaremongering - it's presenting the data for a "what if?".

Premier_2

tomstickland wrote: »

It appears to me as a clear, fact based report.
It clearly says "The ratings agency estimates that house prices, already 7 per cent below their peak, will fall a further 17 per cent, increasing the numbers in negative equity from just 70,000 households today to 1.7m, or 14 per cent of borrowers."
It's not scaremongering - it's presenting the data for a "what if?".

How have they estimated prices will fall a further 17%? Finger in the air ?
Where are the facts to support that estimate?

Should I write a new report based on what happens if prices fall by 46%?

...Most homeowners are extremely safe, the S&P data show, with the average mortgage only 54 per cent of the value of the home....

Perhaps I should apply for a job at S&P.

m00m00

you are happy enough to refer to one isolated report which claims prices will rise by 25%, yet there is nothing between the two in terms of actual knowledge, they are both merely assumptions based on deductions.

Premier_2

m00m00 wrote: »

you are happy enough to refer to one isolated report which claims prices will rise by 25%, yet there is nothing between the two in terms of actual knowledge, they are both merely assumptions based on deductions.

I take it you haven't bothered to read the reports themmselves :rolleyes:

The report by the National Housing Federation tells you on what basis they have predicted the price movements they have.

The S&P report simply says that if prices fall by x%, then the amount of people in negative equity will be y.

As I said, I can't argue with the theory, but it surely didn't need a report by S&P to come to that conclusion, did it?

tomstickland

They've analysed data to show the risk status. It seems very clear to me.

They've clearly stated that they have an estimate of falls. An estimate carries no burden of proof. It's just an opinion.
Personally I believe that a 20% fall is a reasonable estimate.

Premier_2

tomstickland wrote: »

They've analysed data to show the risk status. It seems very clear to me...

Perhaps you could point me in the direction of this analysis, please?

pinkshoes

geoffky wrote: »

One in seven homeowners face negative equity

So we're going to have lots of cheap houses but none for sale?? :rotfl:

Rabiddog_2

Another point to bear in mind wrt b2L is that, of course they are all clustered around the 80% mark.. this is the highest LTV you will get and it is efficient tax wise to keep it at this level, regardless of ability to pay any capital towards the mortgage. It says nothing of the ability of buy to letters to pay down their mortgages if they need or wish to.

tomstickland

Premier wrote: »

Perhaps you could point me in the direction of this analysis, please?

The big graphs that are based on 2m mortages.