Over the last few weeks there have been signs of a possible stabilisation of the UK property market with differing property surveys from Halifax and Nationwide showing a significant difference in performance. This is a common occurrence when the property market is approaching a potential turning point in the cycle and many investors and observers have noticed this with relief. However, statistics regarding the threat of negative equity in the UK appear to show a very different picture which could possibly stall or at best delay a potentially recovery in the UK property market.
The UK property marketDespite news today that property sale asking prices fell by around 8% over the last 12 months there is at least a degree of encouragement with regards to the short to medium term future of the UK property market. However, lurking in the background is the threat of negative equity which is set to rear its ugly head over the next couple of years with a vengeance!
What is negative equity?
In simple terms negative equity is when the value of a property, used as collateral against a loan, falls below the outstanding mortgage on the property. In effect this means that if the property was sold tomorrow and the outstanding mortgage repaid there would be insufficient capital from the sale of the property to repay this in full. Those in a potential negative equity situation may also suffer further loss if their properties repossessed, resold by auction and effectively “given away” at below the market price.
How many homes in the UK are affected by negative equity?
The Council of Mortgage Lenders in the UK recently confirmed that by their own calculations there are around 900,000 homes in the UK which are caught in the negative equity trap. However a moiré recent report by the ITN News Channel has revealed this figure could be anywhere up to 3.5 million homes as a number of properties are still falling in price and official revaluations have not been carried out.
While it must be said that the figure of 3.5 million homes is a little on the excessive side at first glance, representing around one third of all UK homes, there is no doubt that negative equity is set to be a major issue in the months and years to come.
How will the negative equity trap affect the UK property market?
Aside from the fact that the risk of negative equity will in many cases concern first-time buyers and those looking to “upgrade their homes” there are two major impacts which the situation will have on the overall property market.
When a homeowner is caught up in the negative equity trap this means that if they were to repay their current mortgage and take out another they would have to add additional capital into the deal. As money is ever tighter in the UK the chances of home owners having significant capital to put towards a remortgage arrangement is very slim indeed.
So in effect the fact that, in a best case scenario, there are around 900,000 homes in the UK in the negative equity trap means that some 900,000 mortgage holders will not be able to take advantage of reduced rates. This will see those on uncompetitive mortgage rates paying out more and more money for their mortgages simply because they cannot afford to repay their original mortgage and take advantage of better deals on the market.
Unless a homeowner is prepared to downgrade their property we have potentially 900,000 homes in the UK, not to mention those on the verge of repossession, which are likely to remain off the market for some time to come. Not only does this reduce the number of properties for sale but it also takes potentially 900,000 customers out of the UK property market, although this figure could be anything up to 3.5 million.
At this moment in time the UK property market is in desperate need of liquidity and activity and if the figure is anywhere near the 3.5 million suggested by ITN then this could have serious implications for the short to medium term recovery of the UK property market. When you also add in the fact that many first-time buyers are still “finding their feet” and concerned about the threat of unemployment in the short to medium term we could take out anywhere up to 50% of the number of potential property buyers in the UK.
When will the UK property market bounce?
Even in the best case scenario, which would see the UK property market about to “bottom out”, this does not mean a sharp rebound in property prices across the country. We are likely to see a significant period of consolidation which could then be followed by a gradual recovery in property prices as liquidity, buyers and interest returns the market. Those expecting a significant price hike in the short to medium term may well be disappointed as bargain hunters still have the upper hand and buyers are most definitely still in control.
The UK budget
It is rumoured that Alistair Darling will this week introduce significant funding into the UK property market and underwrite a number of mortgage arrangements. However, as we have seen over the last few weeks and months regarding the UK financial sector, all of the money in the world will make no difference unless confidence returns in abundance. Until we see a return of confidence to the UK property market it is highly likely that any significant bounce would be limited as the imbalance between buyers, sellers and mortgage liquidity in UK starts to flatten out.
Negative equity is a subject which few homeowners in the UK feel comfortable discussing as it has always been a threat to many over the last 18 months. Even if we do see a short to medium term recovery in the UK economy, this will come too late for many property owners who are struggling to make ends meet and trapped in properties which have fallen in value, to less than their outstanding mortgages.
While the figure of 3.5 million suggested by ITN may well grab the headlines, it is highly likely that the real figure of negative equity sufferers in the UK is anywhere between the 900,000 suggested by the Council of Mortgage Lenders and the 3.5 million suggested by ITN. Whatever the real figure is there is no doubt it will cause a significant drag on a property price recovery in the UK in the short to medium term.