1.7 million More UK Homeowners Facing Negative Equity
An additional 1.7 million homeowners in the United Kingdom could find themselves in a “negative equity” position if Standard & Poor’s projection of a further 14% decline in house prices comes to pass.
In an updated projection, S&P says that “as an approximate rule of thumb, for every further percentage point decline in house prices, a further 0.5%-1.5% of borrowers (around 60,000-180,000) could enter negative equity. We forecast a further decline of 14% in nominal U.K. house prices before the trough of this cycle is reached in 2009. “
At this point, we expect 1.7 million borrowers—around 14%—would be in negative equity.
Our economists forecast that the overall peak-to-trough decline will be around 25% before prices flatten off in 2009. This represents a further decline of around 14% from the end of August.
S&P noted that in its analysis it has not accounted for ongoing scheduled principal payments on repayment mortgages, which would reduce LTV ratios and therefore the prevalence of negative equity. “Similarly, borrowers may also opt voluntarily to make overpayments of principal, should they wish to replenish their equity cushion.”
Given a greater concentration of higher LTV loans in the nonconforming sector, a greater proportion of nonconforming borrowers would enter negative equity given further house price declines, S&P said. “For example, a further 14% decline could put around 24% of nonconforming borrowers into negative equity, compared with only around 13% of prime borrowers. In the buy-to-let sector, lower maximum LTV ratios on new lending mean few borrowers fall into negative equity for modest house price declines. However, there is a tipping point beyond which a large proportion of the market will be caught in the negative equity net. Given a further 14% decline, we would expect around 19% of buy-to-let borrowers to be in negative equity.”
Further details are available in Risk Of Negative Equity For U.K. Mortgage Borrowers Return.
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