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A Base Rate Cut Ignored by the Banks

 

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Analysis Rejects Repeat of 1990s Housing Crash

 

Financial analysis recently carried out on behalf of the Financial Times suggests that house prices would have to fall by a massive 25% if there were to be another 1990s-style negative equity crisis. That’s more than double the 12% fall that sparked off the crisis in the last decade, where 7% of households ended up in negative equity. The FT’s figures are derived from the Council of Mortgage Lenders database and are consistent with a Bank of England survey carried out last year and the annual accounts of the largest lenders.

 

The reasons cited for negative equity being less of a problem this time around are twofold: Number one, far fewer homes were bought and sold at the height of the recent boom than in the late 1980s and, number two, mortgage lenders were more cautious this time around, offering far fewer high loan-to-value mortgages. Although that last statement sounds quite bizarre in the light of recent events in the banking world, it would seem that at least in recent times the banks have tried to gain a competitive advantage over their rivals, rather than trying to out-do each other by offering ever bigger mortgages, as per the in the late 1980s.

The analysis does suggest that negative equity will still happen, but on a much lower scale than has been predicted. Around 350,000 householders (roughly one in 75) will face negative equity if house prices fall by 10%. Gary Styles, risk director of Hometrack said: “Many of the published estimates of the number of households that could be pushed into negative equity have been very inaccurate and far too high.” The findings also suggested that 1.2 million families would be affected by a 20% drop in house prices and 1.8 million would be underwater with a 25% drop.

 

The conclusions drawn from this analysis are backed up by Bank of England figures, first published in 2005, that show 40% of all mortgages in the 1980s had loan-to-value ratios of 90%. Compare that to recent figures which suggest that the statistic has halved to around 20%. The group that tends to have the highest loan-to-value ratio is first-time buyers. There were 1,040,000 in 1988 and 1989 compared with only 750,000 in 2006 and 2007.

HBOS, the country’s largest mortgage lender says that only 4% of its loan stock has a greater loan-to-value ratio of 90%, whilst Nationwide has only 1% of its mortgage portfolio in that category. To borrow the words of Gary Styles (risk director of Hometrack) once more: “Most of the largest lenders in the UK have very few customers with less than 10% equity in their properties and several of the biggest players have only around 2% of their existing mortgage customers with less than 10% equity.”

So it would appear that, although we should never be complacent about falling house prices, we have much more cause to be relaxed in 2008 than twenty years ago. However, this may be of cold comfort for those who bought at the top of the market.

 

The FT House Price Index

 
Month/Year
House Price
Index
Monthly Change %
Annual Change %
February 2008
£231,530
235.7
0.5
6.1
January 2008
£230,348
234.5
0.2
6.8
December 2007
£229,819
234.0
-0.1
7.6
November 2007
£230,112
234.3
-0.2
8.9
October 2007
£230,481
234.7
0.6
9.9
September 2007
£229,175
233.3
0.8
10.4
August 2007
£227,410
231.5
0.8
10.5