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Up to 11% of UK households in negative equity

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by Gill Montia

In its latest Quarterly Bulletin, the Bank of England estimates that between 700,000 and 1.1 million UK homeowners are in negative equity.

Negative equity occurs when the market value of a house is below the outstanding mortgage.

With house prices falling by around 20% between autumn 2007 and spring 2009, the Bank estimates that between 7% and 11% of UK residential mortgage borrowers are now in negative equity.

However, for most households the total value of negative equity is relatively small.

The bulletin goes on to highlight the effects of negative equity on the wider economy, explaining that it can reduce household mobility and lead to a contraction in the availability of credit (to both households and firms) and a fall in consumer spending.

Prior to the credit crisis, large number of people released cash from their properties when remortgaging or were able to use high levels of equity in their homes to obtain secured loans at favourable rates.

Negative equity can therefore bring about a situation that can “discourage households from borrowing and spending”.

Falling house values may also affect the cost of servicing existing mortgages if borrowers have to refinance at higher rates when their existing deals expire, and consumer spending power is again reduced.

It also undermines the resources available to homeowners in the event of an unexpected loss of income, a situation that may prompt some to save for a rainy day rather than hit the High Street.

Finally, the bulletin states that “large losses on mortgage loans and associated securities can erode banks’ capital positions, affecting both lenders’ willingness and ability to lend
and, in extreme cases, their solvency”.

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News posted: June 12, 2009

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