Negative equity is a millstone on the market, Rightmove reported today.
Describing it as a ‘curse’, Rightmove said that diminished equity for home owners to trade up remains a ‘drag on market activity’.
It said that over one in five (22%) of people who had bought between 2007 and 2012 stated that their properties are now worth less than they paid.
Of those home owners whose properties have gone down in value over the last five years, 17% are in negative equity, rising to 21% among those who bought at the peak of the market in 2007. Nearly half (49%) of those who bought in 2007 say their property is still down in value, limiting their ability to move.
Nevertheless, the Rightmove report, based on a survey of more than 33,000 home movers, says that nearly one in three (29%) expect house prices to rise over the next 12 months.
The proportion is up from 22% a year ago.
But Rightmove director Miles Shipside warned that local market conditions vary, along with a patchy picture of market sentiment.
He said: “[There is nothing] to suggest that an overall housing market recovery is looming on the horizon, despite the wider economy officially emerging from the double dip recession.”
He added: “While a fall in equity is not necessarily a block to a move, with lenders demanding a substantial deposit to unlock their best rates it will deter many from trying to sell and buy again.
“As long as the sums do not add up to make a move up the market worthwhile, we are unlikely to see a substantial recovery in the volume of sales.
“Many home owners who are trapped by the falling value of their bricks and mortar will now feel as though they are prisoners of their own mortgage.
“Five or six years on, many of the first-time buyers of 2007 will be struggling to progress from starter pad to family home.”
The high loan-to-value mortgages that were handed out so freely at the time will continue to exact their punishment, although new FSA rules announced last week will ensure that lenders cannot repeat their mistakes.
He went on: “In the post-2000 free-for-all, many lenders adopted a policy that assumed negative equity was a phenomenon from a previous age. Many built strategies on the cornerstone of increasing property prices and low or no deposit lending.
“The result of this approach is a negative equity millstone around the necks of many buyers from that era which will take years to lift.”
A total of 33,278 responses were received to Rightmove’s survey in the first fortnight of this month.
In a separate ‘consumer sentiment’ survey by Halifax, 56% of people think it is a good time to buy a property, but only 9% think it a good time to sell.
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Comments
Excellent post POTW. The mentality you describe seems to be along the lines of 'well house prices have gone up in the past, so they're going to keep doing so in the future'.
There was another recent story on EAToday that made a similar point, making reference to the numbers of 30-40 year-olds who bought at peak prices and are now 'mortgage prisoners'; those in their 20s were then said to be struggling to save for a deposit. This all leads to the question - who exactly are all the Boomers looking to downsize, like the one in your post, going to be selling to at the price they are after???
"nearly one in three (29%) expect house prices to rise over the next 12 months."
Truly, hope springs eternal in the human breast.
In some areas of the country, prices have fallen. In the areas where property is most expensive, generally prices have not fallen. So the indexes are somewhat skewed.
As for those in negative equity - what the figures also mask is that in the expensive parts of the country (apart from London) house prices have not moved significantly for best part of 10 years. House prices in these areas are becoming like the stock market - static.
But, many of the people who have bought in the last 10 years or so have large mortgages taken out when interest rates are historically low. Wages are pretty static too, falling for many people. If interest rates go up significantly at any point, a huge number of people will not be able to afford them and we'll see a domino effect as house prices fall.
I was chatting to a bloke recently who has just moved up to a 4 bed detached which he paid £575k for (home counties). Turns out he has no kids and traded up because he had some money in the bank earning nothing and figured he might as well 'put it to work' until he retired and downsized. I asked him when he hoped to retire and he said in about 15 years. I asked him what he thought his house might be worth then. His reply was along the lines of 'Who knows - 650 - 700k? No idea really etc. but, crucially, more than he paid for it.)
I asked him where he thought the next generation would find the money to buy the sort of house he was now living in - given he 'made' his equity in the days of massive house price inflation based on bouts of easy/cheap credit and wage inflation and that, in this globalized economy, with interest rates already at rock bottom and house prices completely unaffordable for the next generation. I pointed out to him that someone clambering on the ladder now with even a 50k deposit and a 150k mortgage will need, all other things being equal, a 500k mortage, one day, to buy his house when he downsized.
He, like so many people, has never really given the economy/housing market any serious thought and thinks that the future is going to be an endless projection of the past.
Efforts so far to encourage banks to lend all seem to have had the effect of reducing rates for those with the highest percentages of equity. This article clearly highlights the limits of that approach.
An alternative view...it is not all doom & gloom?
Those who bought during the last five years. Four out of five (78%) their properties are worth the same, or more.
Approx. 80% are not in negative equity.
The most telling stat., if accurate, is the 49% who bought in the one year of 2007 whose properties are down in "value".
Just to be clear, the Rightmove survey says "Seventeen per cent of those whose houses decreased in value between 2007 and today found themselves with a mortgage worth more than their house"
Rightmove asked if people thought their house was worth more or less than it was in 2007. Those who said "less" were then asked a further question.
The headline 1 in 5 figures seems high to many but the following numbers may help;-
5.828m homes have sold across the UK since Jan 2007.
60% of buyers had a mortgage.
60% of all sales in England & Wales were for less than £200k.
House prices across England & Wales are 7% below Jan 2007 according to Land Registry but across Wales they are -14.2% lower and in the North West the are -16% lower
If buyers since 2007 have typically had to put down 15% and you ignore the London/South East then the numbers become possible. Factor in those who aren't necessarily in negative equity but don't have 20% equity now to put down for their next home then 1.5m+ home owners may be trapped, prisoners in their existing home unable to move on.
I would rather here from zoopla now than Miles Shipside, RM are on the slide!