Negative Equity - So What?

[warwickbloke]

Just about every consumable purchased loses value as soon as it is purchased.

A car, for example, is devalued at point of purchase then has interest added if bought on credit.

A great many items of new technology are far more expensive at their outset then become cheaper as they become more commonplace, e.g. plasma screens.

Often items are bought at 'the wrong time' to be economically viable, but are still bought anyway with little criticism.

Much is made of negative equity, why?

This is only relevant if the house is bought as an investment, if it is purchased to be a family home, why should it matter.

I have seen a lot of advice to not buy now, but is there really a great deal of difference between an overvalued house purchased at the low interest rates available now, & a lower priced house purchased with higher interest rate as predicted soon?

The end result will be the same sum, or very little difference to matter very much considering the long term it is spread over.

As long as a body is happy with the house & the repayment amount, surely every other aspect is immaterial.

From the threads on this forum it is apparent it is nigh on impossible to predict the optimum time to enter into any house purchase arrangement, so why should negative equity even be a consideration.

[coolaftershave]

Its not just the negative equity.

My dad paid of his house in 15 years (with deposit, without probably 20-25). Same 4 bed house would take me 50 years plus! Even though I now earn a higer wage that him. Why by now and take away the ability to provide for my family as the youngest come to the age of 25, and also begin to put away a load for retiurment AND have a house to live in instead of selling to fund a granny flat somewhere and turfing my own kids out and leaving them nothing?

It is possible to wait out negative equity, but it would mean you bought at too high price and would suffer the above.

Id rather wait a bit longer, invest my time and money on my youth and then buy when prices are lower and still finish repaying onm a nice property before someone buying a rabit hutch is still paying for their mistake well in to their mid life.

This is not a UK problem. Friends I have in Italy and Greece have the same problem and their parents acknoledge the fact that although it was a struggle to buy a house they at least had a smaller repayment period and got more for their "time spent at work" hours.

The only way the current prices are sustainable if suddenly by some mirrical our lifespans double and so can increase the debt we take on.

CAS

[CrashConnoisseur]

I have seen a lot of advice to not buy now, but is there really a great deal of difference between an overvalued house purchased at the low interest rates available now, & a lower priced house purchased with higher interest rate as predicted soon? [warwickbloke]

Possibly not, but what if the overvalued house purchased at low interest rates results in an overvalued debt with higher interest rates?

Edited June 10, 2006 by Jeff Ross

[bobdylan]

Much is made of negative equity, why?

The loan is secured against the house. If the house is valued less than the loan, the loan is no longer secured and the bank's risk of loss has increased substantially. The bank can decide its best option is to sell the house. As I understand, they used this option in the last crash.

[godsakes]

Just about every consumable purchased loses value as soon as it is purchased.

A car, for example, is devalued at point of purchase then has interest added if bought on credit.

A great many items of new technology are far more expensive at their outset then become cheaper as they become more commonplace, e.g. plasma screens.

Often items are bought at 'the wrong time' to be economically viable, but are still bought anyway with little criticism.

Interesting perspective and i would agree that the home is an expense rather than an investment - but i think to view a house like a modest consumable I think underestimates the huge liability you're undertaking.

There's plenty of people getting into financial trouble with buying plasma screens, cars etc. yet those items are a drop in the ocean compared with a house.

Much is made of negative equity, why?

This is only relevant if the house is bought as an investment, if it is purchased to be a family home, why should it matter.

I have seen a lot of advice to not buy now, but is there really a great deal of difference between an overvalued house purchased at the low interest rates available now, & a lower priced house purchased with higher interest rate as predicted soon?

As long as you can service the debt in theory it's all fine - but I'm sure you can see how there's more scope for things to go horribly wrong when you buy in a low interest rate, high house price environment. than in a low house price environment, high interest rate environment.

in the former, interest rates can shoot up making your mortgage unaffordable, worst still if house prices fall you may be made bankrupt.

in the latter, interest rates may lower, leaving you with more deposable income, and if you lose your job and can't afford the mortgage hopefully your house has gained some value and you can at least sell it off and walk away with something.

So really it's more about risk than anything else – I don’t pretend it’s ever easy to get on the housing ladder but now looks particularly bad.

[Guest pioneer31]

I have seen a lot of advice to not buy now, but is there really a great deal of difference between an overvalued house purchased at the low interest rates available now, & a lower priced house purchased with higher interest rate as predicted soon?

The end result will be the same sum, or very little difference to matter very much considering the long term it is spread over.

It's better to buy at lower prices and higher IR's. Why? Well it's simpler to illustrate why its RISKY to buy at high price, low IR

i) your deposit hardly makes a dent into the total loan, so you still have to borrow a fortune.

ii) prices have reached a peak so prices are likely to fall from now on. NE is only round the corner.

iii)since IR's are ridiculously low, the only way from here is up. Have you factored in (significant?) future rises and how they will affect your monthly repayments? If rates are 4.5%, they could double to 9%. Look at the impact of that on the fortune you have borrowed. If you are borrowing a small amount at say 10%, they are unlikely to go up very much (and if they do, it won't matter much because the PROPORTION of the rate increase is small, e.g. 10% to 12% on £x is less of a worry then 4.5% to 6.5% on £2x)

Edited June 10, 2006 by pioneer31

[right_freds_dead]

neg equity is like paying £180k for a 2 bed flat and then finding two years later the same £180k buys you a 5 bed semi.

how would you ever sell that stupid flat you bought in a boom.

im not forced to wait, but im not prepared to simply hand over hard earned money on something thats about to lose 1000's in value.

i may as well not bother earning it.

[Guest Alright Jack]

Its not just the negative equity.

My dad paid of his house in 15 years (with deposit, without probably 20-25). Same 4 bed house would take me 50 years plus! Even though I now earn a higer wage that him.

This is where the confusion lies. Wages look higher on paper, in truth we earn far less in real terms than our parents did.

Consider the old example given time and again on this forum. Fairly ordinary worker in the 50's, 60's, 70's, say, could afford to buy a home large enough for his whole family. The spouse did not NEED to work and in the majority instance was a full time home-maker.

If you really believe this generation earns more than the previous one then you are deluded.

[Casual Observer]

Consider the old example given time and again on this forum. Fairly ordinary worker in the 50's, 60's, 70's, say, could afford to buy a home large enough for his whole family. The spouse did not NEED to work and in the majority instance was a full time home-maker.

What rubbish!

If that were the case, why did people live in council houses and rented property, much of it barely habitable in the 50s and 60s?

I'm sick to death of younsters on this forum telling me that the average milkman went out and bought a 5 bed detached property out of their loose change.

Only the wealthy middle classes bought property in the 50s and 60s.

If you don't believe me , check out the percentage of owner occupation, now and in the 50s. It is far far higher now.

Edited June 11, 2006 by Casual Observer

[basildonian]

The loan is secured against the house. If the house is valued less than the loan, the loan is no longer secured and the bank's risk of loss has increased substantially. The bank can decide its best option is to sell the house. As I understand, they used this option in the last crash.

This sounds like an urban myth to me. If you keep up the payments in accordance with the agreed terms of the mortgage I cannot see how the bank could suddenly to "sell the house".

I would be interested to hear of any cases where this has actually occurred.

[Casual Observer]

This sounds like an urban myth to me. If you keep up the payments in accordance with the agreed terms of the mortgage I cannot see how the bank could suddenly to "sell the house".

I would be interested to hear of any cases where this has actually occurred.

You are correct. Banks did not reposess properties where repayments were being made, only when they were not. Many people had negative equity for a while, stuck in and rode it out. Eventually NE was eliminated by rising prices post 1995.

Another bear scare story, without fact.

[othello]

Just about every consumable purchased loses value as soon as it is purchased.

A car, for example, is devalued at point of purchase then has interest added if bought on credit.

As long as a body is happy with the house & the repayment amount, surely every other aspect is immaterial.

From the threads on this forum it is apparent it is nigh on impossible to predict the optimum time to enter into any house purchase arrangement, so why should negative equity even be a consideration.

Well firstly depreciation of a car is factored into the purchase decision and the cost is tiny compared to the 25-30% loss in a house price crash. Secondly because the amount is potentially so great, many people in negative equity are unable to sell and move 'up the ladder' as they are unable to fund the repayment gap and end up tied to a place for years unless forced to sell in whcih case they may end up bankrupt or borrowing a huge amount more. Thirdly, even if you do not need to move for the 10 or so years of negative equity, how easy do you think it feels to see buyers purchasing houses similar to yours for vastly less money than you paid while you struggle to pay off your enourmous mortgage? Not good.

[Casual Observer]

Well firstly depreciation of a car is factored into the purchase decision and the cost is tiny compared to the 25-30% loss in a house price crash. Secondly because the amount is potentially so great, many people in negative equity are unable to sell and move 'up the ladder' as they are unable to fund the repayment gap and end up tied to a place for years unless forced to sell in whcih case they may end up bankrupt or borrowing a huge amount more. Thirdly, even if you do not need to move for the 10 or so years of negative equity, how easy do you think it feels to see buyers purchasing houses similar to yours for vastly less money than you paid while you struggle to pay off your enourmous mortgage? Not good.

But if high IRs cause a crash it is likely toi be accompanied by high wae inflation, which will help owners.

Some Bears cite high IRs as a trigger, without taking this into account.

[Realistbear]

To the average sheeple negative equity is terrifying because they had been told by their EA that they had better get in as prices only go up. Looking ahead the sheeple read more negative press about the market flattening out and they read into that a worse-case scenario. They ask questions such as: "what if the unemployment trend gets worse and I have no job and I owe more on my house than its worth..."

The disappointment factor should not be underestimated. We all accept cars and other consumables lose money the moment we buy them. But not so houses, especially in a "Miracle Economy" where borrowing is unlimited and the house becomes your private bank to finance everything from holidays to the council tax.

IMO, the first widespread signs of negative equity will turn this market downward very quickly. It is little wonder that the newspapers ignore the LR stats which, for the North and Midlands, are showing most areas in decline. For those that bought recently that spells negative equity alread.

Edited June 11, 2006 by Realistbear

[Adam]

so why should negative equity even be a consideration.

Its not if you have guaranteed work/income for 10 years

[ftbSean]

But if high IRs cause a crash it is likely toi be accompanied by high wae inflation, which will help owners.

Some Bears cite high IRs as a trigger, without taking this into account.

I take it into account, but low growth and high unemployment tell me not to give that argument much weight. The job market is going to get very competitive in that environment. Not many jobs are safe from the terrible trio of technology, skilled migrant labour and cheap outsourcing. Or is this another myth?

[brassfarthing]

This is where the confusion lies. Wages look higher on paper, in truth we earn far less in real terms than our parents did.

Consider the old example given time and again on this forum. Fairly ordinary worker in the 50's, 60's, 70's, say, could afford to buy a home large enough for his whole family. The spouse did not NEED to work and in the majority instance was a full time home-maker.

If you really believe this generation earns more than the previous one then you are deluded.

A generalisation of course, but I think we definitely earn more than previous generations did. Previous generations also paid a lot more in income tax than we do now.

The difference now is that we live in a consumer society. We are far more materialistic than previous generations. Going 'abroad' for a holiday was something that only the very rich did prior to the 70s. There wasn't the range of white goods and techno-gadgets then. People got the bus to work; a car was something that most people did without until they were in their 30s. These days we have to squeeze home ownership in amongst the need for global travel, designer clothes and hi-tech gadgetry.

Remember too that home ownership itself was something that only older people with families and careers on the way went in for until quite recently. When I was growing up, it was considered a bit weird to want to own a house. It was way too conservative and conventional for most of us. It was as recently as the early/mid-80s that propery ownership became something that young people aspired to, and this is where the current problem really started.

[SeenItAllBefore]

I'm sick to death of younsters on this forum telling me that the average milkman went out and bought a 5 bed detached property out of their loose change.

And I’m sick to death of your generation constantly misrepresenting the past and sticking its head up it’s a*se over the social problems we’re facing at the moment!

Only the wealthy middle classes bought property in the 50s and 60s.

Property ownership might have been a class thing in the 50s and 60s but it had little to do with wealth. And owner occupation is mainly higher now because of the right-to-buy scheme that allowed council tenants to buy their property AT A LARGE DISCOUNT TO MARKET VALUE.

When my parents bought the place I grew up in at the end of the 60s my father was just starting out in his career as a trainee on an average salary for the time yet he could still buy a detached place in a desirable village in the South-East for 3 times his income and afford to keep a wife and 2 kids. We weren’t wealthy by any means but we survived and, after a decade of inflation, the mortgage was equivalent to a year’s salary i.e. a negligible monthly outgoing.

Contrast that with now, where a basic 3 bed semi in the area would cost at least £250,000 – i.e. 10 times the average salary - the youngsters buying them today are never going to be earning that in a decade's time and you can see the enormous difference.

Before this latest boom, household finances in the UK depended on people being largely mortgage-free in early middle age i.e. just at the point where the kids are getting expensive and the need for pension saving starts to loom large. People also tended to inherit a share of their own parents’ properties, further boosting their finances in the lead up to retirement. Today’s youngsters are looking at a completely different financial future. For a start they’re going to have to pay 3-4 times more in real terms for a family home which, in itself, will compromise their own ability to actually finance children in the first place. And their own attempts to provide for their old age will be hampered by both paying higher taxes and having to sell off property they might have inherited to pay for their parent’s generation’s retirement.

I don’t see how the financial future can possibly stack up for today’s 20 somethings the way things stand at the moment and the obligations towards children, their parent and their own retirements are just not going to go away. The only thing that can possibly give is house prices.

Oh, and by the way, the house I grew up in would now cost about 20 times the average salary.

[Casual Observer]

And I’m sick to death of your generation constantly misrepresenting the past and sticking its head up it’s a*se over the social problems we’re facing at the moment!

My generation don't, usually.

But your generation does its cause no good when it claims that every ordinary worker in the 50s and 60s bought himself a nice big house, with no problem at all. Why? Because it's a big, fat useless lie.

Check the levels of owner occupation. They are much higher now, so why claim otherwise?

Property ownership might have been a class thing in the 50s and 60s but it had little to do with wealth. And owner occupation is mainly higher now because of the right-to-buy scheme that allowed council tenants to buy their property AT A LARGE DISCOUNT TO MARKET VALUE.

Very few working class people bought houses in the 50s and 60s. Today they all aspire to, which is a good progressive rise in the standard of living, IMO.

But don't pretend that the average factory worker did so in the 50s/60s, because you don't sound as if you were around to know the facts. Why do you think there was slum landlordism in those times? Why did Rachmanism exist in many large cities? I wonder why, when everyone could afford to buy?

Edited June 11, 2006 by Casual Observer

[Guest pioneer31]

My generation don't, usually.

But your generation does its cause no good when it claims that every ordinary worker in the 50s and 60s bought himself a nice big house, with no problem at all. Why? Because it's a big, fat useless lie.

Check the levels of owner occupation. They are much higher now, so why claim otherwise?

Very few working class people bought houses in the 50s and 60s. Today they all aspire to, which is a good progressive rise in the standard of living, IMO.

But don't pretend that the average factory worker did so in the 50s/60s, because you don't sound as if you were around to know the facts. Why do you think there was slum landlordism in those times? Why did Rachmanism exist in many large cities? I wonder why, when everyone could afford to buy?

well, teachers must have been equivalent to the landed gentry in the 60's because my old man bought a 3 bed detached off his own salary in 1967. He was only earning 25k when he retired (in 1994). Hardly a rich man, but he has a lovely house. Well out of my reach....and his too, now

Edited June 11, 2006 by pioneer31

[Casual Observer]

well, teachers must have been equivalent to the landed gentry in the 60's because my old man bought a 3 bed detached off his own salary in 1967. He was only earning 25k when he retired (in 1994). Hardly a rich man, but he has a lovely house. Well out of my reach....and his too, now

As I say, it makes you wonder why they bothered with council houses, tenements and slums doesn't it?

Cathy Come Home must have been all a dream.....

[Guest pioneer31]

As I say, it makes you wonder why they bothered with council houses, tenements and slums doesn't it?

Cathy Come Home must have been all a dream.....

so how did my old man afford his home then, and yet now all he could afford is a 2 up 2 down in the rough part of town?

[Casual Observer]

so how did my old man afford his home then, and yet now all he could afford is a 2 up 2 down in the rough part of town?

I don't know. But a mate of mine graduated as a teacher in 1971, and could only afford to rent a grotty flat in Camden Town. He finally bought a house in 1982.

Anecdotes are not that helpful in this kind of debate, since personal situations are unknown. However I can only revert to my original question - why bother with council houses and slums, when a teacher (never a well-paid profession) could afford to buy so easily?

And why did my 5 siblings, all earning above average, all rent for the first 10 years of married life in the late 60s/early 70's, despite all wanting desperately to buy? And all on 2 salaries, too.

Remember too that home ownership itself was something that only older people with families and careers on the way went in for until quite recently. When I was growing up, it was considered a bit weird to want to own a house. It was way too conservative and conventional for most of us. It was as recently as the early/mid-80s that propery ownership became something that young people aspired to, and this is where the current problem really started.

Very good point. The other thing is that, in my experience, people used to wait until they married before buying, on 2 salaries.

Nowadays there's an aspiration to buy as a sinleton. I don't know anyone of my generation that did that, they wouldn't have seen the point in it.

The market has responded with a plethora of 2 bed apartments.

[Guest pioneer31]

I don't know. But a mate of mine graduated as a teacher in 1971, and could only afford to rent a grotty flat in Camden Town. He finally bought a house in 1982.

Anecdotes are not that helpful in this kind of debate, since personal situations are unknown. However I can only revert to my original question - why bother with council houses and slums, when a teacher (never a well-paid profession) could afford to buy so easily?

And why did my 5 siblings, all earning above average, all rent for the first 10 years of married life in the late 60s/early 70's, despite all wanting desperately to buy? And all on 2 salaries, too.

Very good point. The other thing is that, in my experience, people used to wait until they married before buying, on 2 salaries.

Nowadays there's an aspiration to buy as a sinleton. I don't know anyone of my generation that did that, they wouldn't have seen the point in it.

The market has responded with a plethora of 2 bed apartments.

you're talking about London right?

[Rigsby]

I don't know. But a mate of mine graduated as a teacher in 1971, and could only afford to rent a grotty flat in Camden Town. He finally bought a house in 1982.

If you look at these figures, its remarkably similar between 1975 & 2005 for FTBs buying a home.

In 1975 it took 15% of take home pay.

In 2005 it took 16% of take home pay.

In 1975 age of borrower was 26.

In 2005 age of borrower was 29.

The only dramatic rise has been in the number of loans and increased level of FTB ownership.

In 1975 number of loans 259300.

In 2005 number of loans 364300.

So it would appear that more FTBs are able to buy than ever before at relative prices that compare almost exactly the same today as 30 years ago.

http://www.cml.org.uk/cml/filegrab/2ML2.xls?ref=4624