The Bank estimates that in London, the South-east and East Anglia, two-thirds of first-time buyers who have bought homes since 1988 have 'negative equity'. A first-time buyer in the South- east who took out a 100 per cent endowment mortgage on a house costing pounds 80,000 in the fourth quarter of 1988 has seen the price drop 25 per cent to pounds 60,000 while the value of the mortgage is still pounds 80,000. Hence, this household has negative equity of pounds 20,000. Homeowners in this position find it difficult and expensive to move house because of the need to bridge the gap between their mortgage debt and the amount they can raise by selling their existing home. The Bank believes the problem is 'likely to remain an important feature of the finances of many households for some time to come'.
For the problem to unwind fully, house price falls since 1988 would have to be reversed or affected households would have to save more. The by-product would be weaker consumer spending and a slower economic recovery.
'For families in the south, the problems . . . seem unlikely to be short-lived,' the Bank argues. 'It would require house price inflation of 10 per cent per annum from early next year to lift all the affected households out of negative equity by the end of 1995.'
Negative equity has already reduced the frequency with which houses are bought and sold, and produced a depressing knock-on effect in the rest of the economy. Spending on many goods has been hit, particularly furniture and furnishings.
House prices in East Anglia have fallen 27 per cent since 1988, while London and the South-west have seen falls of 22 per cent, according to the Halifax Building Society figures on which the Bank has based its calculations. In contrast, house prices in the East Midlands are virtually the same as they were at the end of 1988.
The Bank calculates that the total value of negative equity is about pounds 6bn, a 'conservative' estimate. This is equivalent to 14 per cent of total personal sector savings in 1991. About pounds 3.6bn of the total is accounted for by first-time buyers. The average affected household thus owns a house worth pounds 6,000 less than the value of the mortgage.
Negative equity is concentrated in southern England, where house prices have dropped most sharply. More than pounds 3bn is in the South- east, more than pounds 1bn in London, more than pounds 500m each in East Anglia and the South-west, but less than pounds 500m in total throughout the rest of the country.
Some 20 per cent of those affected have negative equity of pounds 10,000 or more, the Bank calculates. In the South-east this proportion rises to about a quarter.
The Bank's report - released in advance of tomorrow's Quarterly Bulletin - is likely to increase pressure on the Government to take emergency action to boost the housing market. Banks and building societies have suggested several schemes but none appears to have met with Treasury approval.
The Bank's estimate that a million homeowners have negative equity is less gloomy than some recent estimates by City economists. UBS Phillips & Drew and Morgan Grenfell have both recently estimated that the figure is closer to 1.5 million. But the Bank warns that if house prices continue to fall then the number facing negative equity could rise to about these levels.
It forecasts that if house prices fall a further 1 per cent each quarter throughout the country, 1.6 million households will be affected by the end of next year with negative equity totalling some pounds 10.5bn. If house prices rise 1 per cent a quarter, 400,000 people will see the price of their houses rise above the value of their mortgages and pounds 3.5bn of negative equity will be wiped out.Reuse content