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  4. Equity position of borrowers has improved, CML analysis shows

Equity position of borrowers has improved, CML analysis shows


Published: 30 October 2012 | Author: Bernard Clarke

Data we are publishing today shows that the number of households in negative equity has fallen over the last 18 months, and that borrowers collectively continue to hold large amounts of unmortgaged equity in housing, despite modest falls in house prices across the UK and more pronounced reductions in property values in some regions.

Today’s newly-published data updates the analysis of housing equity that we published in August 2011, based on data from the first quarter of last year. The main findings of our re-appraisal of housing equity are that:

  • the amount of unmortgaged housing equity held by borrowers remains broadly unchanged since last year at around £800 billion, despite the weakness of house prices in the intervening period (this level of equity, compared to outstanding mortgage debt, equates to an average loan-to-value ratio of 56%);
  • the number of borrowers in negative equity has declined by more than 100,000 (or 13%) since the first quarter of last year, from 827,000 to 719,000;
  • the proportion of first-time buyers who have taken out loans since 2005 and are in negative equity has declined from 26% to 20%; and
  • around 90% of all borrowers taking out loans since 2005 hold some equity in their property, with more than half owning at least 30% of the value of the property and more than 80% holding an equity cushion of at least 10% of their home’s value.

House price movements

The fall in house prices since their peak in 2007 has led to concerns about the amount of equity some mortgage borrowers have in their homes – particularly those who bought when prices were at or near their highest point. House prices remain some way off that peak, which has reduced mortgage borrowers’ housing wealth to £1,850 billion – down from around £2,100 billion in 2007. 

With little change in total mortgage debt outstanding since 2007, the decline in house prices has eroded the amount of free housing equity (that is, housing wealth not subject to mortgage).

Despite the weaknesses in house prices, however, borrowers continue to hold over £800 billion of unmortgaged housing wealth, with little change since we last published data based on the first three months of 2011. In the intervening period, house prices have barely changed – having declined by 0.3%, according to the Halifax index, and risen by 0.9% using the Nationwide measure. There have, however, been significant variations across the UK. 

Chart One: Equity held by UK home-owners (£ billion)

N&V21.2012 Chart One- Equity held by UK home owners

Source: CML Research

Unmortgaged housing equity of more than £800 billion equates to an average loan-to-value ratio for all borrowers of around 56%. But, of course, this average figure masks significant variations across the market, with some borrowers holding a very small mortgage relative to the value of their home, while others have little or no equity.

Using data on individual loan accounts from our regulated mortgage survey for mortgages advanced since 2005, together with additional information about the status of these loans in later years, we are able to assess the equity position of more than 70% of the 10 million owner-occupied loans outstanding in the UK.
This data shows that the vast majority (90%) of loans advanced since the second quarter of 2005 and still outstanding remain in positive equity. Over half of these loans have an equity cushion of at least 30%, and more than four-fifths have equity of at least 10% of the value of their home.

 Chart Two: Housing equity by year of origination

N&V21.2012 Chart Two- Housing equity by year of origination

Source: CML Research

Most mortgage holders are in a reasonably comfortable equity position, but the house price falls since 2007 have eroded the equity position of households. We estimate that around 719,000 households currently have some negative equity, but the encouraging news is that this represents a 13% decline in the number of borrowers with negative equity from our previous estimate of 827,000 in first quarter of last year.

It is, of course, important to remember that being in negative equity does not imply that the borrower has any difficulty in repaying his or her mortgage. Repayment problems are usually triggered by a change in the borrower’s circumstances – typically, the loss of income through employment changes or illness, or the break-up of a relationship (when a couple are paying a mortgage jointly). Our data show that payment problems peaked during the recent economic downturn at much lower levels than in the early 1990s – and have been on a downward path since 2009.

The key drivers of the current equity position of outstanding loans are the terms on which the loan was originally advanced and what has happened to house prices in the intervening period. For loans advanced in 2007 – when house prices were at their peak and higher loan-to-value mortgages more common – these factors combine to produce a degree of negative equity for borrowers today. We estimate that 26% of mortgages taken out in 2007 are now in negative equity (see Chart Three) – but that is an improvement on to our earlier estimate of 29% in the first quarter of last year.

Chart Three: Mortgages with negative equity, by year of origination


N&V21.2012 Chart Three- Mortgages with negative equity, by year of origination

Source: CML Research

It is the same combination of borrowing terms and house price movements that has affected the equity now held by first-time buyers who took out loans during this period. These borrowers tended to put down smaller deposits, leaving them with a smaller buffer of equity to begin with, and therefore more susceptible to falling house prices.

But first-time buyers, like other borrowers, have seen an improvement in their equity position since last year. We estimate that, among those still living in a first home bought since 2005, around 20% have some degree of negative equity. That compares with our estimate of 26% of first-time buyers in negative equity in our earlier study. 

Any estimate of housing equity will be affected by the choice of house price index used to estimate current property values. In updating our earlier work, we have stuck with the Halifax regional house price index, which was the source of data for last year’s study. However, other house price measures have reported smaller falls in house prices in recent years, and would therefore produce a more positive measure of the amount of housing equity held by existing borrowers in their homes.

Being in negative equity does not imply a borrower has difficulty in repaying the mortgage

Recent analysis by the Financial Services Authority (FSA) indicates that calculations based the Nationwide house price index would suggest that only around 5% of borrowers taking out a loan since 2005 would now be in negative equity. Using the Acadametrics index would result in a lower rate still. 

The FSA’s estimates using the Halifax index are largely in line with our own – with around 10% of mortgages advanced since 2005 currently in negative equity. The improvement in the equity position since our latest estimate may be partly attributed to some small improvements in house prices over the last year or so in some regions of the UK (see Chart Four). But house prices are still below their peak level across the country.

Given the sensitivity of findings on negative equity to the choice of index used, our analysis based on the Halifax could be seen as a "worst case" estimate. Perhaps, therefore, it would be better to pay more attention to the overall improvement in levels of housing equity, rather than the numbers produced using different indices.    

Chart Four: Change in Halifax house prices since 2011 Q1 by standard statistical region

N&V21.2012 Chart Four- Change in Halifax house prices since 2011 Q1 by standard statistical region

Source: Halifax House Price Index

Since house prices started to fall in 2007, different parts of the UK have experienced significantly different price movements. At one extreme, prices in Northern Ireland are now less than half of the 2007 peak. In London and the south east, however, prices have been much more resilient. 

Table One shows the scale of negative equity in different regions of the UK. The data here is closely correlated with differences in house price movements.

At 35%, Northern Ireland has the highest proportion of mortgages advanced since 2005 that are now in negative equity. This is not surprising, however, given the scale of house price falls. The data also reflects a trend noted in our earlier analysis, with higher rates of negative equity in northern regions. By contrast, those in the south have a lower than average proportion of loans in negative equity – again reflecting house price movements.

Table One: Geography of negative equity, mortgages advanced since 2005

 N&V21.2012 Table One -Geography of negative equity, mortgages advanced since 2005

Source: CML estimates


The vast majority of borrowers have a significant amount of equity in their homes. It is also encouraging to find that the equity position of UK households has improved over the last year. It is, however, inevitable that, with house price lower than their peak in 2007, some borrowers will find themselves with reduced equity in their homes. 

Being in negative equity may make it more difficult for some borrowers to move home or re-finance. But lenders continue to show flexibility, where possible, despite facing their own funding, capital and regulatory constraints. There are therefore options available allowing some borrowers to transfer negative equity to a new loan.   

Despite the constraints on lenders, borrowers have more options than during the downturn in the 1990s, when the choices were essentially between staying put or selling and accepting a lower price than they had paid previously. Today’s much larger private rental sector, for example, provides greater scope and flexibility to those considering letting out their home and renting another, with some lenders also providing an option that was not available in the last market downturn – buying another property with a rent-to-buy loan. The NewBuy scheme is another alternative for existing home-owners with reduced equity who may be able to afford only a small deposit.

The experience in the 1990s was that borrowers with little or no equity often stayed in their homes, perhaps for several years, while they re-built their equity or savings. It seems likely that low levels of – or negative – equity are a cause of low numbers of transactions, currently running at around half their peak level. But the economic recession, low levels of consumer confidence and more restrictive lending criteria are also having an effect, and we must be careful not to overstate the extent – or the effects – of negative equity.