If House Prices Drop Another 40% - Who’s at risk of Negative Equity?

brit1234

If House Prices Drop Another 40% - Who’s at risk of Negative Equity?


Negative equity is already playing it’s part in stifling the property market and it is set to make matters worse.


If prices do drop by another 40% (according to MoneyWeek) or more, over the next few years the number of people finding themselves in negative equity is likely to increase substantially.


The actual number of homeowners facing the prospect of negative equity is difficult to quantify because there is limited and conflicting data available.


According to the Bank of England between 7% and 11% of UK homeowners are now in negative equity a recent report suggests this equates to between 700,000 and 1,100,000 people.


If 700,000 is 7% that report suggests there are 10,000,000 homeowners in the UK.
But according to the Telegraph in 2008 the figure was closer to 14,500,000 and I’m pretty sure 4.5million people haven’t lost or sold their houses in the last year. Unless nearly 30% of all UK homeowners own their property outright?


7% to 11% of 14,500,000 is 1,015,000 and 1,595,000 respectively which is between 315,000 and 495,000 more people in negative equity than the Bank of England suggests.


The ‘NMG Research Survey’ commissioned by the Bank of England and carried out in October 2008 on a sample of just 1000 people forms the basis of the recent report and the report also suggests many of the people surveyed probably overstated the value of their homes.


This means the real number of people either in or facing negative equity, is probably much higher.


According to FSA data used in the report, approximately 75% of all homeowners have 25% equity.


That means 25% of homeowners have less than 25% equity. That means if house prices drop by another 25% then 25% of all homeowners will be in negative equity.


If there are 14.5 Million homeowners in the UK then the number of people in negative equity will reach a staggering 3,500,000.


But house prices could drop another 40%.


The MoneyWeek article refers to affordability as the main contributor to the potential decline and compares the events of past crashes to predict a 40% drop.
The Bank of England report has another interesting graph showing Nominal House Prices and Real House Prices with the peak of 2007 as the 100% mark. A simple extrapolation of the Real House Prices suggests a correction being approximately 20% lower than the current point (from peak, or 25% from the current level) but as all past crashes have shown, the actual bottoming out occurs well below the target.

So a drop of 30% - 40% more is not unrealistic.


If 3,500,000 homeowners will be in negative equity if house prices drop 25%, how many will be if they drop by 40% or more?


Data from Mortgages.co.uk suggests the average mortgage size in 06 - 07 was approximately £138,000 which by now on a repayment basis could put the average around £135,000 (roughly) and the house price average is now down to approx £150,000.

That actually puts the average Loan to Value at 90%!! I think a recent survey of more than 1000 people might help to shed some light on that!
Take the survey: What’s your Loan to Value?


http://www.ukmoneypot.co.uk/if-house-prices-drop-another-40-whos-at-risk-of-negative-equity.htm

ad44downey

brit1234 wrote: »

If House Prices Drop Another 40% - Who’s at risk of Negative Equity?

There would be especially bad news for BTL would-be spivs if this would come to pass. :T

Thrugelmir

Providing people can meet their monthly mortgage repayments being in negative equity is of no consequence to the majority.

If anything it is more likely going to focus peoples minds to what they can do without to repay the debt quicker.

Cleaver

Whenever you post Brit, I always read with interest, admire the work you've put in around links, structure and stats, but always get to the end and wonder what the point was.

ad44downey

It's self-explanatory to me cleaver, you should try paying more attention. Or get chucky to copy and paste his favourite graph, you might be able to understand that one. If you do, let everyone else into the secret. cheers.

amcluesent

Inflation will be shooting up soon enough, that'll "save" those who are hopelessly indebted, inc. HM Treasury of course.

brit1234

Cleaver wrote: »

Whenever you post Brit, I always read with interest, admire the work you've put in around links, structure and stats, but always get to the end and wonder what the point was.

The point is make people more aware of possible situations, people can then discuss the pros and cons of the evidence/predictions to developed a more informed knowledge.

I fear you next quotes will be "Burn books" and "four legs bad, two legs good".

Cleaver

brit1234 wrote: »

The point is make people more aware of possible situations, people can then discuss the pros and cons of the evidence/predictions to developed a more informed knowledge.

Yeah, that's a fair point, I was a bit harsh.

Can you really see house prices falling 60% though? Honestly? Isn't it a moot point? They have fallen around 20% (I think - sure someone will correct me) and have been stagnant for most of this year. And we've seen financial meltdown, more of Robert Peston that is healthy and house prices seem to be clinging on. Maybe I'm wrong, but I can't see anywhere near another 40%.

Did you see my thread about selling my house last week? It was on the market for three days, had shed loads of viewings and (I didn't mention this in the thread) we had two offers £1k over the asking price. I dunno, I just can't see it sliding that much further. You'd think people would like to see us return to a sensible level but, as I've said a load of boring times on here before, the general public in this country love their houses, love seeing them as an 'investment vehicle' and seem hell bent on buying.

brit1234 wrote: »

I fear you next quotes will be "Burn books" and "four legs bad, two legs good".

I wasn't trying to stiffle discussion, although I do concede it looks like that. But your post was just a load of stats... but then they weren't stats, they were based on a 'what if' situation of house prices falling 60%.

Also, how much savings do people have? Could that be used to pay off mortgages, thus moving them out of negative equity? And, if negative equity just means you stay in your house for 6 or 7 years instead of 'moving up the ladder' every 2 years, is a bad thing overall?

Cleaver

ad44downey wrote: »

It's self-explanatory to me cleaver, you should try paying more attention. Or get chucky to copy and paste his favourite graph, you might be able to understand that one. If you do, let everyone else into the secret. cheers.

Thanks for the advice Mr Downey. Your post was actually more than one sentence for a change too, so I might actually consider following it.

StevieJ

Take the survey: What’s your Loan to Value?

How come the options only start at 50%? just about undestandable if FTB only.

GDB2222

StevieJ wrote: »

Take the survey: What’s your Loan to Value?

How come the options only start at 50%? just about undestandable if FTB only.

Surely many people who bought 10 years ago or more are looking at loans currently of 30% or less - unless they MEW'ed. In most cases, if they've been paying a reasonable amount to pay off the loan, it could be a lot less than 30%.

For BTLs, if you get a high enough initial yield it pays off any loans pretty quickly. Of course lots of BTL'ers bought unsuitable properties at yields that were too low.