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300,000 Londoners face negative equity trap
Jonathan Prynn, Consumer Affairs Editor19.11.08
Hundreds of thousands of London home owners are heading for negative equity as the economy slides inexorably towards the uncharted territory of deflation.
Property prices that are already around 20 per cent below their summer 2007 peak will keep falling all through next year - though at a slower pace - say some of the gloomier City forecasters. When they touch bottom at a predicted 25 to 30 per cent down, some 300,000 London houses and flats could be worth less than the loans taken out to buy them. By then the British economy could well be in its first period of deflation since 1960, bringing a host of unpredictable consequences.
It used to be said that a healthy dose of inflation was good for the economy, like the dirt that is supposed to boost the body's immune system.
It certainly helped property owners because in an era of fast rising prices and wages, mortgages magically shrank in size, in real terms at least.
A £100,000 mortgage taken out on a £30,000 salary suddenly seems a lot more manageable when a few years of healthy inflation-plus pay rises have taken it up to £50,000.
But those days are over. In an era of zero or even negative inflation and non-existent pay rises those vast mortgages taken out at the top of the property boom just do not seem to get any smaller.
Worst-off will be those who lose their jobs and cannot pay their monthly mortgage bills. Up to 370,000 Londoners are forecast to be made jobless in the recession. Many will be in negative equity and will have their properties repossessed. The lenders will put these homes on the market at knock-down prices.
Slightly better off will be those still in work who clambered on to the property ladder with 100 per cent interest-only mortgages last summer. Not only are they sitting on growing chasms of negative equity, neither are they chipping away at their debt like anyone on a traditional repayment deal. At worst they will have to give up their home at the end of their mortgage term to pay off the loan.
Those who did buy with repayment mortgages last year but are now deep in negative equity face 25 years of hard labour paying off debts that dwarf the value of their home.
Ben Reed, managing economist at forecasters CEBR, says prices will not get back to their summer 2007 levels until 2013. People with large chunks of negative equity will find it almost impossible to move so have little choice but to hunker down and hope for the best.
But it is not all bad news in the age of deflation. Borrowers who took out tracker mortgages that follow the Bank of England's base rate - around a third of all borrowers - have already seen massive reductions in their monthly mortgage bills. Further cuts in interest rates are inevitable, with at least a half-point and possibly more, coming in December. Indeed many economists believe rates will fall to an all-time low of one per cent or even zero in 2009.
Those with most to cheer about are the several thousand who took out a fabled Cheltenham & Gloucester discount tracker mortgage last summer. This is priced at 1.01 per cent below the base rate so their interest rate is already down to 1.99 per cent. If base rates do get down to one per cent they will be "paying" minus 0.01 per cent, in effect nothing.
Not all commentators believe that the outlook for the market is unremittingly bleak. Ray Boulger, technical manager at brokers John Charcol, says: "The big plus is that interest rates are the biggest driver of property prices. Even if unemployment goes to three million, that still means more than 90 per cent have got a job so the majority will benefit from lower interest rates. So I think we will see interest in the property market starting to pick up next year with prices starting to rise in the second-half of 2009."
But he added: "The big problem is the lack of funding. It is very difficult to get mortgages unless you have got a 15 per cent and preferably 25 per cent deposit. Even in the depths of the late Eighties and early Nineties there was never a shortage of mortgage finance."
For those Londoners in work who have watched the value of their homes fall faster than David Cameron's poll ratings, there is little to do other than sit tight and reflect that the money lost is money that was never really owned.
What our homes are worth now ... FOUR evening standard writers monitor the meltdown
VANORA BENNETT
What: five-bedroom townhouse in Kentish Town
Value March 2007: £995,000
Value April 2008: £995,000
Value now: £800,000-£850,000
Clive Nunes at our local Winkworth says that his office is selling quite a bit. The price has dropped but as he said: "If you're buying and selling in the same market it's not a problem.
"I've worked in this area since the 1980s," he says. "I was working in the last recession and we were selling properties then. It's just the same now because Kentish Town is well located, central and not expensive."
So we're staying put. There are good schools and doctors. We have the Heath and the British Library on our doorstep, plenty of house for our money and lovely neighbours. There's even a deli on our road. True, we are working harder than before on paying off the mortgage, in case of a credit crunch fallout later, but we don't have any plans to leave.
LUCY CAVENDISH
What: four-bedroom village house with outbuildings in Oxfordshire
Value March 2007: £895,000
Value April 2008: £800,000-£850,000
Value now: £750,000
Nicholas Brown from Knight Frank in Henley-on-Thames says that the area has held its value yet somehow my house is worth rather less that it was.
He says sales are still buoyant in the commuter areas west of London - Buckinghamshire, Berkshire, Oxfordshire, Wiltshire and parts of Gloucestershire. Areas further away, such as in Devon and Dorset, have crashed, so this would be a good time for us to move there.
He believes if we priced our house at a realistic level we would sell: "The reason most properties don't shift is because agents overprice them."
Brown would like to see a suspension of stamp duty for a year and for HIPS to become voluntary.
We are not worried about our house price as we are happy to remain in it. We are extending it next year as it seems better to put our savings into bricks and mortar than the bank.
NICK CURTIS
What: four-bedroom, Victorian, semidetached house in Oval with small garden.
Bought for: £185,000 in 1996.
Value in March 2007: £650,000
Value in April 2008: £685,000
Value now: £575,000
Nigel Fields of Winkworth in Kennington says prices on my kind of property are down by 15 per cent, "although it's hard to be accurate as nothing is selling in any volume at the moment".
Not that I mind. Long before the current troubles my wife Ann and I had decided to stay put. Recently I earmarked some money to buy the derelict garden behind mine: that attempt failed so I used the cash to reduce my mortgage.
I don't mean to be smug but prices have a long way to fall before I'm in negative equity. I'm now having a couple of rotten windows fixed: any spare cash will go on reducing the mortgage further.
The house isn't an investment, it's our home. We love the proximity to the West End and the City. Ann can walk to her new job on the Strand. We like the mixed area, being close to the Thames and having a garden.
PETE CLARK
What: three-bedroom terrace house in Shepherd's Bush
Value March 2007: £570,000
Value April 2008: £513,000
Value now: £450,000
Paul Jorgensen of Jorgensen & Turner sounded surprisingly upbeat. "I'd say the price of your house is down around 12 per cent since July/August, whereas less desirable properties have dropped as much as 20 per cent.
"This winter will be slow but the bail-out of the banks will have a trickle-down effect and, by mid-spring, it will be better. There are still buyers around, although not in such large volumes, and sellers will just have to bite the bullet on house prices."
While I would not consider selling at this time, an alternative had presented itself. My wife and I had just come back from Cambodia and liked the idea of living there for a year or so. Paul said renting out houses was increasingly popular and the rent would cover the mortgage repayments and leave a tidy monthly profit. This is seriously being considered.
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