Page last updated at 10:57 GMT, Friday, 27 February 2009

'Millions facing negative equity'

Houses for sale in Macclesfield
The figure is much higher than other negative equity estimates

Nearly four million homeowners are in, or close to, negative equity as the property market stutters, according to research group GfK NOP.

The figure is based on a survey with 60,000 UK householders and is by far the bleakest assessment of the effect of the slump in house prices.

The report suggested that young people who took out mortgages at the peak of the market were most affected.

Others in the industry regarded the figure as "extreme".

Other estimates have suggested two million fewer were at risk.

Negative equity is generally only a significant issue for homeowners if they need to move.

Analysis

The research suggested that about one in three mortgage-holders was in negative equity - in other words, owing more on a mortgage than their home is worth. This was twice as many as in the house price slump of the 1990s.

When you make an assessment of negative equity, you have to make significant assumptions
Simon Rubinsohn, Rics chief economist

Researchers asked how much owners bought their properties for and with what kind of mortgage. They then compared this with the house price index produced by the Halifax, which estimated that property prices had dropped by 17.2% in the last year.

The report found that single people aged between 25 and 34, young couples and young families who took out mortgages with very small or no deposit since 2005 were most at risk.

Andy Thwaites, of GfK Financial, said that many people had been relying on the growing value of their home to supplement their income or their retirement fund.

"The shift to negative equity has the potential to be a mammoth welfare disaster for the nation," he said.

"The reality is that if there are further job cuts, the problem will become significantly worse."

'Extreme'

Other estimates have been much lower and Simon Rubinsohn, chief economist of the Royal Institution of Chartered Surveyors (Rics), said that he regarded the latest estimate as "a little extreme".

The psychological impact of negative equity would be greater than the actual effect. The proportion of owners selling up, even in 2007, was no more than 8%.

"It [the GfK report] has highlighted an important point that negative equity has returned and is getting worse," he said.

"But when you make an assessment of negative equity, you have to make significant assumptions. There is a danger of people becoming obsessed with negative equity when they are not planning to move."

He said that the volatility of the market made it extremely difficult to judge the value of properties at present, and house price surveys were giving varying results.

Most homeowners had entered the market when the loan-to-value ratio of mortgages was more likely to be down at 60%, rather than 95%.

People tended to stay in their homes for six to seven years. The market by the next time they moved was likely to be more stable, he said.

Reasons to move

The actual impact of negative equity generally struck when people were forced to move. This could be caused by a change of job to a new area, family break-up or downscaling because of a loss of income during the recession.

Ray Boulger, of mortgage brokers John Charcol, agreed that the GfK estimate of negative equity was too high. He said that lenders were tending to treat homeowners in this situation sympathetically.

One option, at times of low interest rates, was for owners to rent out their home to cover mortgage repayments.

Recent surveys said that the rental market was becoming flooded by frustrated sellers.

Buy-to-let investors are widely regarded to be most affected by negative equity during the housing market slump.

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