Negative equity restricting home sales

Friday, 17 April 2009 10:17 AM

Negative equity is affecting 900,000 home-owners who are choosing to sit tight rather than sell up.

Research from the Council of Mortgage Lenders (CML) has found negative equity, where a home is worth less than its mortgage, has been the result of falling house prices.

However, the CML were quick to point out two thirds of those facing negative equity were experiencing only "modest shortfalls", of ten per cent or less, and the scale of the issue "needs to be kept in perspective", as home-owners still have around £2.1 trillion of unmortgaged housing equity.

Bob Pannell, CML head of research, said: "Although negative equity has resurfaced as house prices have fallen, one big difference from the early 1990s downturn is that it is less concentrated among young, first-time buyers, and more evenly spread across wider age groups and those at different points on the housing ladder."

At the bottom of the last housing market recession in 1993, 1.5 million households were in negative equity. The CML say today's borrowers are following the same pattern of the 90's borrowers, choosing to stay put and wait to recover their equity position.

The research, which was carried out by James Tatch, senior statistician at the CML, pointed out there is no causal link between negative equity and mortgage repayment problems. The CML said repayment problems are typically associated with unexpected spending problems, such as job loss, while negative equity only surfaces as a problem when a household needs to move.

"Negative equity will contribute to subdued property turnover, but otherwise should have few adverse effects for the majority of households affected.

"Where people need to move house for job or other priority reasons, lenders can often be flexible to existing borrowers with low or negative equity, as long as their financial position is sound and they have a good payment track record. Otherwise, sitting tight and building up savings or overpaying on the mortgage are the strategies most borrowers are likely to adopt. It should be easier for households to rebuild their equity position than in the early 1990s, as low interest rates on their mortgage can help them to save or overpay more quickly," Mr Pannell added.

Regionally, the concentration of negative equity is by far the greatest in the north, where almost ten per cent of owner-occupied houses are estimated to be in negative equity.

However, in Scotland very few borrowers are in negative equity - just one per cent of total owner occupiers.

Sarah Garrod

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