Debate House Prices
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What would really happen if house prices fell substantially?

shupufski_2
Posts: 96 Forumite
Rather than the usual knee-jerk answer, does anyone know the true profile of outstanding mortgages vs. value of homes on the market?
It’s my general understanding that a large percentage of homes have no mortgage. Also, of those with a mortgage, a large percentage have substantial equity when compared with current values.
Thus the percentage of homes that would fall into negative equity as a result of a significant fall is nowhere near as catastrophic as some would have you believe.
The reason I ask is because the assertion that house prices = wealth underpins most of the VI rhetoric concerning price falls. Whereas, if my understanding is correct, the true impact of a general fall in prices would be mainly a paper loss - and therefore says a lot about the UK's sense of entitlement and greed.
It’s my general understanding that a large percentage of homes have no mortgage. Also, of those with a mortgage, a large percentage have substantial equity when compared with current values.
Thus the percentage of homes that would fall into negative equity as a result of a significant fall is nowhere near as catastrophic as some would have you believe.
The reason I ask is because the assertion that house prices = wealth underpins most of the VI rhetoric concerning price falls. Whereas, if my understanding is correct, the true impact of a general fall in prices would be mainly a paper loss - and therefore says a lot about the UK's sense of entitlement and greed.
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Comments
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It's the investment in property that would cause the problems.
If prices fell substatially, those invested, be it large companies, banks, or a one man BTL, would suffer.
We have a situation now where so many are invested, with such large amounts invested, the severity in the outcome of falls is higher than ever before.0 -
You are also forgetting the effect on commercial real estate values if the resi takes a hit. The banks have very large holdings of commi paper...
Also, the problem with mortgages is, the distribution of lending means the paper the banks hold is focussed typically on the properties that have been bought most recently and will suffer the most from price falls, IE newbuild flats and houses. Those owning superprime will need a minimal loan and the effect of any falls, whilst still significant, will never push these individuals into NE.0 -
Usually not that much, we always make it through - depends on which side of the fence you sit.
That said, bit of reality about prices wouldn't go amiss - average prices of 170/180k hardly ties neatly into average earnings.0 -
In the last big crash in 1990 I was in NE for about 10 years and also had to put up with rates of over 10%.
Wasn't the end of the world though as some would have you believe.0 -
Well Japan house price crash was 80%.
I dont think we will be that much.0 -
A knock on effect is of course negative equity. UK law currently allows lenders to chase borrowers for every penny + interest on sums borrowed irrespective of the value of the property it is secured against.
If prices fell significantly and stayed down then more and more people would default on their loans if the falls were particularly severe then this could become a deluge of proportions where the lenders and the law were unable to keep up with those defaulting.
That could in turn lead to a breakdown in the system.
Think what could the authorities do if 90% of people refused to pay their council tax? Other than try and deduct it at source.
People would refuse to pay bank loans, overdraft fees, credit card bills. electricity bills the list goes on.
If the system breaks down then it would mean financial Armageddon. Sterling would become worthless probably as a result of hyper inflation in the lead up to the crisis.
Oh and the bankers wouldn't be too chuffed cos they wouldn't be getting a bonus.
Cast your minds back to the days RBS, HBOS and Lloyds went to the wall. It was only very swift Government intervention that stopped this Armageddon then.
They were hours away from closing all banks and powering down all ATM's across the Country.0 -
Why would people stop paying their mortgages due to negative equity?0
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its interest rates that may cause the biggest problem,if they rise to only 2% alot of lenders would increase svr`s to 6-7% then the fun will start.
why cant people get the message that a property is a home not just an investment?0 -
Why would people stop paying their mortgages due to negative equity?
Loss of job, Increase in interest rates, loss of benefit such as child allowance that is being drawn back and tax credits in the next couple of years, genuine affordability factors weighed against the knowledge people are paying far more than they have to.
End of the day its the affordability factor. Interest rates were cut drastically to accommodate that affordability factor for persons that were lent to much by the naughty banks. At some point those rates will start to rise (early 2011)
This needs to be thought about with the backdrop in job losses that are coming in the next few years.
Those that have been prudent and paying down their loans and that have not used equity for holidays/new cars and or kitchens and the like should be able to ride it out. Those that have not may well have difficulty.
The boom was not all about the banks lending too much to too many persons it was also high consumer spending on the back of equity withdrawal.0 -
So it may not be that bad, I would suggest that only a couple of % may lead to repossesion and it would all sort itself out after a couple of years.0
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