The equity question

Fasten your seat belts, it’s going to be a bumpy night

In the last recession, most of the headlines to do with housing were about people who couldn’t afford to stay in their homes because the interest rates on their mortgages was taking payments far beyond their reach.

They had paid inflated prices for property and tens of thousands of them sold up or handed back the keys and walked away, often leaving them with huge debts to the very building societies that had been so willing to lend the money in the first place.

We haven’t seen so many of these headlines this time, largely because the interest rates that were so punative then are, currently, risible. People who under higher rates might have had no choice but to get rid of the debt have found that their repayments are in fact manageable.

But for how long? A report in today’s Financial Times believes there is a time-bomb of negative equity waiting to hit the housing market. The report they quote, which is by Fitch Ratings, forecasts a peak-to-trough fall in house prices of up to 35%, although there are some buy-to-let boom areas where the drop has already been steeper than that.

Interest rates are not going to stay at their current low level for very long, the APRs offered on high street mortgages have been creeping slowly upwards in the last few weeks. Negative equity is only a problem if you have to sell, so the low interest rates have helped to effectively hide a significant number of people who, as interest rates start to rise, will find it harder to meet payments.

What most estate agents are saying is that the lack of properties coming to market is behind the apparent hardening of house prices. If more and more homes are forced onto the market as rates rise, the buyer/seller ratio changes in the buyer’s favour, leading to prices falling.

What does it means for merchants? That rather depends on where the majority of your customers find their work. Much of the RMI market is dependent upon housing transactions; in theory a rise in transaction levels leads to more work and more materials sold and houses that are unsold tend not to have much spent on them.

On the otherhand, there does seem to be some evidence that some householders are using what disposible income they have to improve houses so that they will sell better in the long term.

What all this means in real terms is that if we are bumping along the bottom, the way up isn’t going to be a nice, straight, easily trackable line, but will have some pretty noticable highs and lows .

About Fiona Russell-Horne

Group Managing Editor across the BMJ portfolio.

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