Negative Equity - are you affected?

Posted in 'Credit Crunch' by Barry Stamp

15 November 2011

People who bought property four years ago, at the height of the latest property cycle, are at the highest risk of being in negative equity, according to a new report published by HSBC.

It argues that the average price of a first time buyer’s house was £162,423 in 2007 but this has now fallen to £151,062.

Having said this, we reported in 2009 that at that time house prices generally had fallen by 18% since 2007; so arguably, things have either got a little better since 2009, or first time buyers aren’t being hit quite so hard as the rest of us.

Whichever figures are relied upon, there is no doubt that the severity of the recent fall in house prices is worse than was witnessed in the last recession in the early 1990’s, where prices fell by around 13%.

But that’s far from the full story. At the peak of the last recession, some 1.5 million homeowners faced negative equity, and in the 1980’s recession, many householders saw the price of their homes fall by up to 50%.

Some recent surveys have reported small increases in house prices over recent months, giving hope that the fall in house prices is arresting, or possibly even reversing – certainly the position varies from location to location – there are purple patches and grey patches and the average figures can easily hide what is happening in specific areas.

The CML - the Committee of Mortgage Lenders - has historically pointed out that the make-up of the homeowners affected now by negative equity means that the long-term effect shouldn’t be as bad this time around. Crucially, the demographic mix of homeowners is much broader. In the early 1990’s the majority of people falling into negative equity were first time buyers. There is now a much broader spectrum, covering all ages, locations and borrowers on all stages of the housing ladder.

The average level of negative equity is calculated at £6000 and is potentially much more manageable than the much higher levels seen in recent decades.

The CML believes that the knock-on effect of the negative equity headlines may see many homeowners sitting tight and waiting for prices to recover further – replicating the response to the 1990’s slump, when prices took almost 10 years to recover to previous levels.

A key point highlighted both by the CML in the past and also by HSBC now is that where homeowners do sit back and wait, their future ability to move will be influenced by the amount of deposit they are able to save, and of course their credit rating.

Check your credit rating now for free for 30 days by trialling our Multi Agency Credit Report monitoring service – cancel anytime – if you don’t cancel the monthly subscription is an affordable £8.99 per month .

If you want to see how house prices are changing in your area, you can check the actual sales figures for different types of property in any postcode using our Check Any Postcode service, which is completely free.