17th May 2011
The threat of negative equity is hanging over the heads of hundreds of thousands of homeowners who put down deposits of less than 20% during the boom years. Falling house prices have effectively wiped out their deposits and mean they could now owe more on their mortgage than their property is worth.
Last week, Britain's biggest mortgage lender Lloyds Banking Group, admitted it already had 150,000 borrowers in negative equity. Meanwhile Bank of England figures suggest there could be as many as 350,000 more households, with loans from other banks and building societies, which owe more than their property is worth.
According to figures from Halifax, house prices are 20% below their 2007 peak. This has wiped more than £39,000 off the average property price. Just last week, Halifax reported further falls of an average 1.4% last month. Some regions are hit worst than others – in the North-East, house prices have fallen 10% since August.
Economists are predicting more doom and gloom too. Howard Archer, of IHS Global Insight, predicts the average house price to fall 10% by the end of the year while consultancy Capital Economics, believes prices could fall by up to 20% by the end of 2012.
Banks are already cautious about lending too much of a property's value as a mortgage. It's risky for them to lend to people with small amounts of equity as a fall in house prices is likely to plunge them into negative equity – and this will mean a loss for the bank if the property is repossessed.
Bank of England figures show that just 6,000 borrowers with less than a 10% deposit were approved a mortgage in the last four months of 2010. In the whole year, just 2% of all mortgages approved were granted to borrowers with less than 10% to put down.
Meanwhile even those people who still have equity in their properties are finding it nearly impossible to sell, with properties remaining on the market for much longer than usual.
So what should property investors do? Jim Rehlaender, manager of Schroder Global Property Securities fund, said rental income on property portfolios in the UK had held up remarkably well.
"According to Investment Property Databank total net rental income has only fallen by 1.2% since its peak in 2008, highlighting the extent to which the upward only rent review clause on existing leases protects landlords against falls in open market rental values.
He added that as an investment, commercial property still held its ground. "Our view is that property yields will remain stable through 2011, provided long gilt yields remain below 4-4.5%. If long gilt yields jumped higher, property yields could rise. This would depress capital values alongside other asset classes such as equities.
"Given the uncertainty over the medium term outlook for inflation we believe that there may be interesting opportunities in certain niche property sectors where rents are index-linked and underpinned by structural factors. We see opportunities in the residential, healthcare and waste management sectors which are supported by demographic and technological trends."
As reported in This is Money, "Rightmove's 'time on the market' measure has charted for years the average number of days a property is listed. In January this measure reached a year-long peak of 110 days.
Before the financial crisis, the measure dropped as low as 70 days and rarely exceeded 85."
Last week the Royal Institute of Chartered Surveyors reported that sellers were being tempted back to the market – but whether sales will be completed is another issue.
RICS housing spokesperson Michael Newey said: "The return of sellers to the market is positive, but activity still remains subdued and it is difficult to see it picking up materially over the coming months. Although there are signs that some lenders may be reducing their grip on the purse strings, in particular with mortgages aimed at first-time buyers, there is still a long way to go before lending levels increase enough to have any real impact. Economic uncertainty may also continue to weigh on sentiment for a while to come."
According to property website Zoopla, sellers are being forced to reduce asking prices by an average of almost £20,000 to secure a sale. The site's figures suggest buyers are offering 7% less than the asking price.
Nicholas Leeming, director at Zoopla, said: "Weak demand as a result of the continued lack of availability of mortgage finance has caused sellers to knock ever more off their asking price over the last 12 months in order to make a sale. This is great news for buyers who are able to pick up more of a bargain in the housing market now than at any time in the last year."
The trouble is the housing market is stagnating due to a lack of first-time buyers. So while there may be bargains out there up for grabs, first-time buyers aren't able to get the mortgage required to snap them up. It seems only the cash rich can afford to buy at the moment and this often means buy-to-let landlords with a portfolio of properties, rather than a typical first-time buyer single person or couple.
On the Telegraph Dissavowed complains the Government has not introduced any policies, to discourage landlords. "First-time buyers are never going to get a look in, until we discourage buy-to-let," he says, "In a fair and equal society, a system should be implemented so that