When the Bank of England speaks about the UK economy it really is time to listen and when the subject of negative equity raises its head there are sure to be problems. The fact that the Bank has chosen now to speak out and confirm that, in contrast to previous statements, negative equity is going to be a major problem in the UK over the next few years it is a wake up call for many property owners and property investors.
It seems as though the UK property market is set for one of the worst periods since at least the 1990s and possibly World War I. Everything seems to be going against the sector at the moment and while there is hope longer term, many investors have written off the UK property scene for the next couple of years at least.
So what happened to the rescue package?
While they say a week is a long time in politics, this has never been more true that of recent times with Gordon Brown on a rollercoaster ride of emotions. He was as low as he possibly could be just a few months ago with his colleagues queuing up to stab him in the back and then came his saving grace, the UK rescue package which has since been copied around the world. He hit the headlines, “Super Gordon”, “Gordon is back” and others which made great reading for the under pressure PM. But over the last few days we have seen a number of his ideas and plans unravel before our very eyes.
A summary of recent times
Top of the agenda for Gordon Brown from a very early stage of the slowdown was, and continues to be, the property market which is the key to any kind of recovery in the UK. We have seen it all, upbeat statements, downbeat statements, warnings for financial restraint, a multi billion pound rescue deal and finally news that the UK economy is slowing down and has shrunk over the last quarter. The recession is on the way!
This has already pushed around 500,000 homeowners into negative equity and the Bank of England report today suggests that this will hit 1.2 million over the next couple of years. Not only is this bad news for those homeowners caught up in the negative equity trap but it has massive consequences for the property market in the UK.
The UK property market
The UK property market is a major part of the UK economy and one of the main cogs in the whole system, allowing other areas of the UK economy to run smoothly, transferring wealth and allowing banks to operate in the mortgage and loans markets. However, once that property market cog begins to slow this has a massive impact on the overall workings of the UK economy and other areas begin to slow and seize up.
The UK property market cog has been slowing of late with finance deals few and far between, little activity in the market and a generally downbeat view on the prospects for the UK economy. However, the impact of negative equity on 1 in 10 mortgage holders in the UK could send the cog into reverse!
The impact of negative equity
While we have all heard the horror stories of home buyers being stuck in the same property for years because of negative equity and an ever changing property market, these tales were probably far removed from those who acquired property at the top of the UK market. Prices were rising year on year, the economy was doing well and even stock markets were showing signs of life, then the credit crunch hit and as a direct consequence of this we are set to see more than 1 million UK home owners plunged into negative equity.
Unable to move home because of the fact they owe more money on their mortgage than their home is worth, we will see the UK property market slow even further in the short term with the medium term prospects not too hot either. There are two main elements to any property market, financial prosperity to ensure a constant turnover of homes as people look to upgrade and an influx of first time buyers.
Negative equity will cut off the food supply for the market such as those trading up to the next housing level and the lack of finance available from UK banks has, and continues to, takeout first time buyers. When you also consider that the ‘fat’ of higher prices only 12 months ago has now disappeared there is literally nothing for the property market to feed off.
The turnaround
While there had been hopes that the UK rescue package would help the UK economy into a sharp turnaround, each and every day that passes sees more holes in this train of thought. Finance has not appeared, even though this was part of the rescue package, domestic property investors are showing very little interest in the market, stock markets are plunging and more and more homeowners on the fringes of negative equity will be looking to downgrade in the short term to avoid being saddled with debt for years to come.
So the turnaround that investors all hoped for and expected will not be coming in the short term, it will not be coming in the medium term and in fact nobody knows when markets will bottom out. The constant stream of bad news in the sector cannot go on forever and while there will be some distressed sellers attracting brave, long term investors over the coming months, the likelihood is that many investors will just sit on the sidelines until the future becomes a little clearer.
Conclusion
Historically the Bank of England has been very conservative in its estimates of future good and future bad news so the fact they estimate 1.2 million home owners will fall into negative equity may actually turn out to be a little on the low side. However, we can but hope that they have called the bottom of the market, but with some forecasters suggesting 2013 will be the year the property market recovers, we could all be in for a very long wait indeed.