There’s good news from the think-tank the Resolution Foundation, which says the threat of negative equity because of the Coronavirus crisis is far lower than after the global financial crash of 2008.
A report released with the support of the Nuffield Foundation considers the risk of families falling into negative equity during the current crisis, and who is most at risk.
It warns that the recent surge in house prices post-lockdown may end this autumn and it examines the impact of the Office for Budget Responsibility’s central scenario of a likely eight per cent fall in house prices, and its downside risk of a 16 per cent fall.
The report finds that under the OBR’s central scenario, just six per cent of homeowners would fall into low or negative equity - defined as less than a 10 per cent equity stake. This would rise to 11 per cent under its downside risk scenario.
During the last recession, 15 per cent of homeowners fell into low or negative equity following a 17 per cent fall in house prices.
This reduced risk today is primarily due to there being far fewer young homeowners. Decades of falling home ownership mean that there are over a million fewer families headed by someone aged under 44 and under with mortgages today than there were 10 years ago.
In addition, tougher lending criteria have mitigated the risk of negative equity. The proportion of homeowners taking on new mortgages with Loan To Value ratios of 90 per cent and over has fallen from 31 per cent to 20 per cent since before the financial crisis.
In combination, this means that the proportion of all home-owning families with ‘risky’ mortgages has more than halved from five to two per cent since 2006-08.
The Foundation says that policy makers should look at other areas of housing stress – such as the number of private renter households who are building up arrears, or the 1.9m mortgagors who have delayed payments via mortgage holidays during this crisis.
It claims both groups face the ongoing challenge of being able to pay their housing costs as unemployment rises in the months ahead, with the danger being there are evicted if they cannot do so.