What would really happen if house prices fell substantially?

Thrugelmir

pararct wrote: »

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.

Correction Lloyds didn't nearly go the wall. Read the group's accounts , it has always remained highly profitable.

olly300

ILW wrote: »

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.

You mean 10 years minimum which is what happened last time and people had less consumer debt.

DervProf

pararct wrote: »

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.

It was a suggestion (probably a bit crazy ?) of mine that instead of trying to prop up the property market (and thus prevent negative equity, and the possibility of many people not being able to re-mortgage), the government should have passed rules/laws that forced the banks to take on mortgage payers in negative equity who were keeping up with repayments. This would allow people to stay in their own homes, even though they would not have the equity required to cover the amount owed, and it would allow property prices to re-adjust. Long term, most people would come back out of negative equity, and because the market hadn`t been propped up with taxpayer`s money (or very low interest rates), the economy would be a lot more stable, and have room for manouvre.

Like I said, "crazy". Or is it ?

ILW

DervProf wrote: »

It was a suggestion (probably a bit crazy ?) of mine that instead of trying to prop up the property market (and thus prevent negative equity, and the possibility of many people not being able to re-mortgage), the government should have passed rules/laws that forced the banks to take on mortgage payers in negative equity who were keeping up with repayments. This would allow people to stay in their own homes, even though they would not have the equity required to cover the amount owed, and it would allow property prices to re-adjust. Long term, most people would come back out of negative equity, and because the market hadn`t been propped up with taxpayer`s money (or very low interest rates), the economy would be a lot more stable, and have room for manouvre.

Like I said, "crazy". Or is it ?

Not sure of the point, if you are currently keeping up repayments your home is in no danger even if you are in NE.

DervProf

ILW wrote: »

Not sure of the point, if you are currently keeping up repayments your home is in no danger even if you are in NE.

What happens if you come to the end of your current mortgage deal and want to re-mortgage for a better deal, but you are in NE ? And can`t the banks repossess a property if the mortgage falls below a certain LTV level (due to NE) ?

ILW

DervProf wrote: »

What happens if you come to the end of your current mortgage deal and want to re-mortgage for a better deal, but you are in NE ? And can`t the banks repossess a property if the mortgage falls below a certain LTV level (due to NE) ?

You will have to go onto the banks SVR and no they cannot and will not reposses you for going below a certain LTV. Again it is not as bad as people make out.

Mustbeananswer??

Look I'm a real novice....but what COULD the Government to do rekindle the Banks faith in the FTB.Isn't that the problem ....nobodies getting on the bottom rung cos the Banks are frightened to lend money!!!??

You may call it a stupid analogy but wasn't that a good move they made to get rid of dodgy cars....The Scrappage Scheme.It worked for all parties and the car market recovered....a bit!!

I'm not suggesting a scrappage schem for houses of course....but surely there is some legislation they can pass to get things moving again....or we're all going down the Plughole!!

HAMISH_MCTAVISH

shupufski wrote: »

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.

I think you're entirely missing the point.

But first, to answer your questions..... (from memory, stats may be slightly different now)

There are roughly 22 million privately owned houses.

There are roughly 11.5 million mortgages.

In the recent crash, around 1 million went into negative equity, and around 3 million dropped close enough to negative equity that they can't remortage to move at a cost effective rate.

The total value of UK mortgage debt is around 1.4 trillion pounds.

The total value of the UK housing market is around 4 trillion pounds.

So......

It doesn't take a big fall in prices for bank balance sheets to be seriously hurt, which impacts not just on mortgage borrowing but also lending to business.

The banks almost went under with falls of 23%, now fair enough they've been able to rebuild balance sheets since then, but what do you think would happen with falls of 40%?

When lending for business is decimated as a result of banking difficulties following house price falls, what do you think happens to business investment, job creation, unemployment, etc?

Big house price falls also hammer consumer confidence, resulting in big reductions in consumer spending. When less money is spent in the economy, fewer jobs are sustained, unemployment increases, businesses fail, etc.

The result of 4 million houses being blocked from moving due to negative equity, or close enough to it, is that supply reduces dramatically.

And of course, many mroe people take houses off the market as they simply won't sell for less than they consider it to be worth. Particularly downsizers, investment property owners, second home owners, etc, and IMO this section of property owners is bigger than the ones in or close to negative equity.

As a result, and as we saw last time, property supply falls rapidly by about 50%.

And of course, even less properties are built, whcih stores up price booms for the future as well.

In short, little good can come of a crash, and the idea that ANY government will just let one happen without acting to prevent it is incredibly naive.

des_cartes

HAMISH_MCTAVISH wrote: »

I think you're entirely missing the point.

But first, to answer your questions..... (from memory, stats may be slightly different now)

There are roughly 22 million privately owned houses.

There are roughly 11.5 million mortgages.

In the recent crash, around 1 million went into negative equity, and around 3 million dropped close enough to negative equity that they can't remortage to move at a cost effective rate.

The total value of UK mortgage debt is around 1.4 trillion pounds.

The total value of the UK housing market is around 4 trillion pounds.

So......

It doesn't take a big fall in prices for bank balance sheets to be seriously hurt, which impacts not just on mortgage borrowing but also lending to business.

The banks almost went under with falls of 23%, now fair enough they've been able to rebuild balance sheets since then, but what do you think would happen with falls of 40%?

When lending for business is decimated as a result of banking difficulties following house price falls, what do you think happens to business investment, job creation, unemployment, etc?

Big house price falls also hammer consumer confidence, resulting in big reductions in consumer spending. When less money is spent in the economy, fewer jobs are sustained, unemployment increases, businesses fail, etc.

The result of 4 million houses being blocked from moving due to negative equity, or close enough to it, is that supply reduces dramatically.

And of course, many mroe people take houses off the market as they simply won't sell for less than they consider it to be worth. Particularly downsizers, investment property owners, second home owners, etc, and IMO this section of property owners is bigger than the ones in or close to negative equity.

As a result, and as we saw last time, property supply falls rapidly by about 50%.

And of course, even less properties are built, whcih stores up price booms for the future as well.

In short, little good can come of a crash, and the idea that ANY government will just let one happen without acting to prevent it is incredibly naive.

ok so mortgage debt = 1.4 trn. Now by no means are all those mortgages 100% ltv and some have been going for a good few years with substantial capital being repaid on them. I would estimate (without any evidence) that the value of mortgaged properties is around 2 trn (making the average outstanding mortgage debt 70% ltv). In this scenario, a 30% fall in prices would result in total mortgage debt = total value of mortgaged properties. Hardly a disaster for lenders who have after all had 18 months of virtually free money to give themselves a pretty good level of cash. As for thinking that a) the government can prevent a crash and b) that they would want to, what makes you think the UK government could hold back the tide of house price corrections that has affected almost every other economy since 2007/8? The Americans failed, the Japanese failed and as for litle old Ireland, I'm sure you know what has happened to their house prices. No, the UK government are powerless to stop market forces. Maggie knew that 30 years ago and nothing has changed.

greenbubble

Mustbeananswer?? wrote: »

You may call it a stupid analogy but wasn't that a good move they made to get rid of dodgy cars....The Scrappage Scheme.It worked for all parties and the car market recovered....a bit!!

how did this help all those small independent garages ?

law of unintended consequences im afraid.

so who actually benifited from this ?

green