Number of UK property owners in negative equity falls, says CML data
The number of UK residential properties in negative equity has fallen over the last 18 months and borrowers collectively continue to hold large amounts of unmortgaged equity in housing despite modest falls in house prices across the UK and more pronounced reductions in property values in some regions.
This latest analysis from the Council of Mortgage Lenders also shows that the amount of unmortgaged housing equity held by borrowers remains broadly unchanged since last year at around £800 billion, despite the weakness of house prices in the intervening period.
Overall 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 and the proportion of first time buyers who have taken out loans since 2005 and are in negative equity has declined from 26% to 20%.
The data also shows that 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 points out that 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 £1,850 billion, down from around £2,100 billion 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 £800 billion of unmortgaged housing wealth, with little changed since the last published data based on the first three months of 2011.
In the intervening period, house prices have barely changed, having declined by 0.3%, according to the Halifax index, and risen by 0.9% using the Nationwide measure. There have, however, been significant variations across the UK.
‘Most mortgage holders are in a reasonably comfortable equity position, but the house price falls since 2007 have eroded the equity position of households. We estimate that around 719,000 households currently have some negative equity, but the encouraging news is that this represents a 13% decline in the number of borrowers with negative equity from our previous estimate of 827,000 in first quarter of last year,’ says the report.
‘It is, of course, important to remember that being in negative equity does not imply that the borrower has any difficulty in repaying his or her mortgage. Repayment problems are usually triggered by a change in the borrower’s circumstances, typically the loss of income through employment changes or illness, or the break-up of a relationship when a couple are paying a mortgage jointly,’ it explains.
The data show that payment problems peaked during the recent economic downturn at much lower levels than in the early 1990s and have been on a downward path since 2009.
The key drivers of the current equity position of outstanding loans are the terms on which the loan was originally advanced and what has happened to house prices in the intervening period. For loans advanced in 2007, when house prices were at their peak and higher loan to value mortgages more common, these factors combine to produce a degree of negative equity for borrowers today.
The CML estimates that 26% of mortgages taken out in 2007 are now in negative equity but that is an improvement on the earlier estimate of 29% in the first quarter of last year.
‘The vast majority of borrowers have a significant amount of equity in their homes. It is also encouraging to find that the equity position of UK households has improved over the last year. It is, however, inevitable that, with house price lower than their peak in 2007, some borrowers will find themselves with reduced equity in their homes,’ the report points out.
It adds that being in negative equity may make it more difficult for some borrowers to move home or re-finance. But lenders continue to show flexibility, where possible, despite facing their own funding, capital and regulatory constraints. There are therefore options available allowing some borrowers to transfer negative equity to a new loan.
Also, despite the constraints on lenders, borrowers have more options than during the downturn in the 1990s, when the choices were essentially between staying put or selling and accepting a lower price than they had paid previously.
‘Today’s much larger private rental sector, for example, provides greater scope and flexibility to those considering letting out their home and renting another, with some lenders also providing an option that was not available in the last market downturn such as buying another property with a rent to buy loan,’ the report says, adding that the NewBuy scheme is another alternative for existing home owners with reduced equity who may be able to afford only a small deposit.
‘The experience in the 1990s was that borrowers with little or no equity often stayed in their homes, perhaps for several years, while they re-built their equity or savings. 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,’ it concludes.