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CML and S&P research findings chime on housing equity

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Published: 23 August 2011 | Author: Bernard Clarke

Research from the CML published in early August, and analysis from Standard & Poor’s published later in the month, both report findings relating to levels of negative equity across the UK which largely identify similar trends.

With the CML research showing fewer than an estimated 8% of all borrowers in negative equity, and S&P putting the figure at around 5% based on its sample of loans within securitised loan portfolios, the overwhelming message from both pieces of research is reassuring. The proportion of borrowers with negative equity is small.

However, both reports also identify another cohort of borrowers with equity of less than 10% whose remortgaging options are likely to be limited, and who could tip into negative equity if house prices fell. S&P suggests around 14.5% of mortgages were in this position at the end of the first quarter of the year. Our research – based on a vast sample, but of post-2005 mortgages only, and so not strictly comparable -  would suggest a slightly higher figure, resulting in a combined total of about a quarter of post-2005 loans in a position of either negative or less than 10% equity.

Both reports identify substantial regional differences in the incidence of negative equity, with northern regions on the whole experiencing a higher proportion of cases. The CML research suggests around a quarter of post-2005 mortgages are in negative equity in Northern Ireland, Yorkshire & Humberside, and the North East, compared with only around 7% or so in the South East and the South West. S&P’s findings echo the trend, albeit with lower estimates. Overall, S&P estimates that around 8.5% of loans in the North were in negative equity at the end of the first quarter, against 2.5% in the South.

On the positive side, the CML research also looked at the overall equity picture within the UK owner-occupier sector and found that UK borrowers still have a huge equity cushion overall. Leaving aside the estimated £1.43 trillion of housing wealth held by unmortgaged outright home-owners, mortgage borrowers hold an estimated £800 billion of unmortgaged housing wealth in their homes, even taking account of recent market conditions and the house price fluctuations of recent years.

Another way of expressing this is to say that the aggregate loan-to-value ratio of mortgaged property is around 58% (even allowing for the fact that house prices have fallen on some properties since the loan was taken out). This is an extremely conservative ratio, and firmly puts paid to the myth that the mortgage lending industry as a whole was indulging in risky high loan-to-value lending as a matter of course, even in the boom conditions before the credit crunch.

Taken together with the fact that most borrowers with negative equity are continuing to pay their mortgages in full and on time, and under the current low interest rate scenario may also be able to overpay and improve their equity position, the constraints imposed by negative equity in the market need to be kept in perspective.