Wednesday, August 12, 2009

Negative equity - UK style

Negative equity is a very different beast compared to the last bubble.

There is a simple reason - sales volumes in the UK market are much lower than in the US. Comparatively few people were buying and selling property during the bubble. Moreover, much of the activity was between speculators taking a punt on the BTL market. For the vast majority of UK homeowners, conventional mortgage debt remains lower than existing home valuations.

Our problem lies elsewhere. It is with home equity loans. During the bubble, homeowners gazed with a greedy eye into their local estate agents windows, made a personal valuation of their home, promptly went down to the bank, and filled in an application for a home equity loan. A computer scored the application. Since computers don't think, the inflated home valuation was taken as a fact, and a big fat loan was approved.

With home values down 20 percent, this has constrained banks in terms of issuing new personal loans collateralized on property. This is why the Bank of England and the government are so desperate to see a return to housing inflation. Without it, banks can not ratchet up personal lending volumes, especially remortgages and home equity loans. Without a renewed surge of secured consumer credit, aggregate demand remains depressed and the economy continues to wallow in recession.

This sad problem illustrates just how distorted the UK economy has become. Economic growth no longer depends upon innovation, entrepreneurial risk taking and investment. It depends on our collective and highly subjective valuations of the homes we live in. If we don't believe that house prices are inflating, banks cannot increase their lending volumes and the economy grinds to a halt.

What a sorry mess.


  1. The market is going up on low volume. Markets 101 states that this is an indication of a weak trend that will, at some future date, reverse. It must be so.

  2. "It's the new paradigm! Nobody needs to make thing anymore." *runs to fetch my gun*

  3. Yup.

    The negative-equity-o-meter is currently standing at one in ten borrowers (or maybe only one in twelve if you believe the banks), and we've plenty more house price falls to come!

  4. If the UK as a whole lived within it's means then the average standard of living would be similar to that in India or China.
    The difference is made up by borrowing... in the last decade it was against hyped-up property values.
    I honestly don't know what the UK has to offer now to pay off it's debts... this is not a recession, it is merely a taster of what lies ahead for Britains "hard working families"... no wonder Brown wants
    a return to house price inflation before the general election !!!

  5. A population of drunks, drug addicts, lippy wasters, liars, thieves, scum bags, pendanctic middle class turd collectors, all overseen by a corrupt caste of filching politicians and bankers. What on earth does Britain really have to offer the world?

    We are on course to matching Chindia's standard of living, before reaching our final destination: Haiti. Enjoy the ride you sad scamsters!

  6. I say! You've mis-spelt "pedantic"!

    [goes off to collect turd]

  7. "A population of drunks, drug addicts, lippy wasters, liars, thieves, scum bags, pendanctic middle class turd collectors, all overseen by a corrupt caste of filching politicians and bankers. What on earth does Britain really have to offer the world?"

    That is what is left here, Anon. Modern Britain is a diaspora - our truly talented inhabiting all corners of the globe, still innovating, still creating, still continuing our lineage ... only no longer under our flag.

    This is the product of politicians who no longer believe in the nation state.

  8. "Economic growth no longer depends upon innovation, entrepreneurial risk taking and investment"

    and dare I say as well as above,
    adding value (and UK jobs) in manufacturing.

  9. It doesn't add up...August 15, 2009 at 3:15 AM

    I actually did some analysis of the Bank of England mortgage statistics. If you look at the net outstanding mortgages (series LPMVTXH in their database), you will see that between 1993 (earliest available date) and 1998 it was increasing at around 5% p.a.. This seems reasonable - the capital borrowed is mostly paid off in the later years of a mortgage, and since house building hasn't added greatly to the stock of houses, new first time buyers are effectively replacing those who bought 15-20 years ago at much lower prices.

    In the period from 1999 (essentially after Brown's tripartite regulation of banking removed effective oversight and the switch to CPI (excluding housing cost) as the BoE inflation target), the growth in total mortgage debt outstanding increases alarmingly, peaking at around 15% in 2003/04, and staying above 10% until 2008 when the credit crunch began to really bite.

    The key point here is that, unlike in former times where people kept the same mortgage until it was paid off or at least until they moved house, these days people re-mortgage every 2-3 years as their old fixed or floating deal runs out and threatens to fall back to an expensive SVR unless they pay a fee for a new deal. Now, you might think that this was a good mechanism for lenders, since it gives an opportunity not only to make additional profit from collecting the renewal fee, but also to conduct a proper check on the ongoing creditworthiness of the borrower and the value of their collateral. However, when you analyse the data for the average size of remortgage, you find that the amount borrowed correlates most strongly not with the average mortgage taken out 2-3 years or more previously, but with the prevailing average mortgage taken out for fresh house purchases. Essentially, that proves your theory that people geared up their mortgages repeatedly at each renewal, rather than paying them off gradually.

    The role of MEW loans separate from the main mortgage has been a little more muted: such loans are usually more expensive (they are second in line after the main mortgage should the borrower default) unless the purpose is property improvement, where the collateral security looks rather better. However, there are undoubtedly those who used this as e.g. a means of paying off credit card debt.

    The BoE has a nice chart of housing equity withdrawal (defined as new borrowing secured on dwellings that is not invested in the housing market (e.g. not used for house purchase or home improvements)) here:

    If you believe that chart, at least people are now starting to repay some of their borrowings rather than adding to them, though as you point out that may be more to do with what the banks are prepared to lend as the driving force.