UK Home Owners Headed for Negative Equity

The prospect of UK mortgage borrowers sliding into a negative equity scenario increased Thursday as UK house prices showed their biggest annual fall in July since Nationwide’s housing survey was introduced in 1991.

The 8.1% annual decline came after house prices dropped by 1.7% in July, the BBC reports. The average home now costs £169,316 which is nearly £15,000 cheaper than in the same month last year.

This news adds credence to Standard & Poor’s assessment that “the current run of house price declines raises the prospect of negative equity for a large number of homeowners, a situation not seen since the 1990’s house price recession.”

In a report prepared prior to the latest Nationwide numbers, S&P says its economists “forecast a further drop of around 17% before prices flatten off in 2009.”

In this scenario, a significant number of UK mortgage borrowers would fall into negative equity.

Moody’s has researched the risk of negative equity using loan-by-loan data for a sample of over two million outstanding U.K. mortgages, and estimates that:

• The average UK mortgage has a loan-to-value (LTV) ratio of only about 54%.
• Nevertheless, around 70,000 (0.6%) of U.K. borrowers are currently in negative equity.
• A further house price decline of 17% would raise this number to about 1.7 million (14%).
• Borrowers in the buy-to-let and nonconforming sectors are more exposed to negative equity under this house price decline assumption.