Negative equity numbers sliding, say mortgage lenders

More than one in four home owners who took out a mortgage in 2007 are in negative equity, as are one in five first-time buyers who still live in a property purchased since 2005.

However, both sets of numbers have dropped over the last 18 months, and the overall number of households in negative equity has also fallen.

This is despite modest falls in house prices across the UK, more pronounced in some regions than others. Around 10% of all mortgages advanced since 2005 are in negative equity.

However, the amount of equity in people’s homes has reduced and low equity is one cause of sharply reduced housing transactions – running at about half historic norms.

The data is from the Council of Mortgage Lenders which has updated its analysis published in August last year and which related to the first quarter of 2011.

The main findings of the CML’s re-appraisal of housing equity are that:

    •    the number of borrowers in negative equity has declined by more than 100,000 (or 13%) since the first quarter of last year, from 827,000 to 719,000;

    •    the proportion of first-time buyers who have taken out loans since 2005 and are in negative equity has declined from 26% to 20%; 

    •    around 90% of all borrowers taking out loans since 2005 hold some equity in their property, with more than half owning at least 30% of the value of the property and more than 80% holding an equity cushion of at least 10% of their home’s value.

The CML says the fall in house prices since their peak in 2007 has led to concerns about the amount of equity some mortgage borrowers have in their homes – particularly those who bought when prices were at or near their highest point.

House prices remain some way off that peak, which has reduced mortgage borrowers’ housing wealth to £1,850bn – down from around £2,100bn in 2007.

With little change in total mortgage debt outstanding since 2007, the decline in house prices has eroded the amount of free housing equity (that is, housing wealth not subject to mortgage).

Despite the weaknesses in house prices, however, borrowers continue to hold over £800bn of unmortgaged housing wealth, little changed from the first three months of 2011.

In the intervening period, national average house prices have barely changed – down by 0.3% according to the Halifax index, and up 0.9% using the Nationwide measure. However, there have been significant variations across the UK.

Unmortgaged housing equity of more than £800bn equates to an average loan-to-value ratio for all borrowers of around 56%.

Using data on mortgages advanced since the second quarter of 2005, the CML says 90% of loans that are still outstanding remain in positive equity.

Over half of these loans have an equity cushion of at least 30% and more than four-fifths have equity of at least 10% of the value of their home.

The CML estimates that 26% of mortgages taken out in 2007 are now in negative equity – but that is an improvement on its earlier estimate of 29% in the first quarter of last year.

The CML concludes: “It seems likely that low levels of – or negative – equity are a cause of low numbers of transactions, currently running at around half their peak level.

“But the economic recession, low levels of consumer confidence and more restrictive lending criteria are also having an effect, and we must be careful not to overstate the extent – or the effects – of negative equity.”