Friday, February 27, 2009

A bit exaggerated but good housecrash porn nonetheless

5m could slip into negative equity

"Their fall into negative equity has the potential to be a 'mammoth welfare disaster', a group predicted yesterday. It is estimated that 3.8million homeowners are facing a significant decrease in the value of their property compared to borrowings by the end of the year. A further 1.2million are likely to fall into negative equity should house prices drop another ten to 20 per cent as predicted, added researcher GfK NOP after a survey of 60,000 people." I think that five million is wildly exaggerated, I'd expect two to three million by the end of 2009, but I like the way the article says "should prices drop another ten to twenty per cent as predicted".

Posted by mark wadsworth @ 07:35 AM (1310 views)
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23 thoughts on “A bit exaggerated but good housecrash porn nonetheless

  • happy mondays says:

    Don’t believe it! House prices will stabilize by spring and the bounce back up to make a colossal profit making machine , so we all shall be rich beyond our wildest dreams..And everyone lives happily ever after!

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  • voiceofreason says:

    No mention of the savers who are all losing a packet then !
    Odd seeing as savers outnumber borrowers by 6 to 1.

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  • Can anyone clear up yet more confusion for me regarding negative equity. If someone borrowed 120% LTV on £100000 (and most borrowed at least twice that) but lets use £100000, and your home is now worthy £80000, and your fixed rate is about to finish, (took the loan in 2007 fixed 2 years), what happens? If lenders no longer do 120% LTV, even if you can get a 100% does that mean you have to find £40000 before you can get a 100% mortgage, that is the original £20000 you borrowed on top of the £100000 + the £20000 your house has made in loss? I read yesterday that Northern Rock is making 1 million a month in charges from borrowers in negative equity that can’t afford to pay, and I am just wondering when instead of just insisting that bankers give back their pensions, we insist that instead of the government forcing lenders to lend 90% mortgages etc., we all force EVERYONE to look that is the government / fsa/ bank of england and the UK population at the amount of debt we have got in rather than fixing mortgages at 3x’s income 6 years ago, that is the point that property was seen as investment. If the government now REALLY WANTS TO HELP first time buyers then they DON’T NEED his 90% mortgages, they need the government and everyone else to say WE GOT THIS WRONG, we should have said NO to higher and higher house prices that made a considerable amount of very well off people A LOT OF MONEY whilst breaking the banks because normal people could not afford them. Instead of green shoots we need to get back to grass roots, its going to hurt, 5 million people in negative equity is not going to go away, but using the banks that were the ones that really got us in this mess with HUGE overlending to now try to kick start a market that would not be inflated if not for their overlending is clearly madness . The sooner we address root causes the sooner we can move towards sensible lending, sensible prices tied to income (and that includes those in the bottom 1/5th) .

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  • I fail to see how “The shift to negative equity has the potential to be a mammoth welfare disaster for the nation” given that, if you can continue paying your mortgage, the only issue is that you cannot move home without paying the shortfall between the price you get for your house and the mortgage. The key problem is not being able to afford your mortgage, in which case not being able to downsize is going to be a killer – but the problem there is unaffordability, not negative equity per se.

    It might be more correct to say “The shift to negative equity has the potential to be a mammoth disaster for the housing market of the nation” since 5m people unable to move home would have a lasting efect on number of transactions in the long term.

    This is unless I am missing something of course.

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  • I think “a massive welfare disaster” would be quite useful. A bit of economic brutality might improve attitudes.

    voiceofreason: I’m a saver but I’m not losing a packet. Enough of the victim attitude. Get out there and work your savings hard. The government isn’t going to help you so do it for yourself

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  • @ Happy Mondays,

    It’s the wish of all homeowners to have a stable market. It helps ordinary people like me to plan ahead. The government could have stabilised the housing market 4 or 5 years back, using interest rates, (in fact Gordon promised such stability in the late 90’s) but chose to let the market inflate.

    It’s not just those who are approaching negative equity that are worried, its all those trying to buy/sell for valid reasons like job moves, family size changes and so on. Also the people who stretched themselves to buy their home and are struggling to pay their way.

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  • bob1 – bang on. Greed has played a big part in how we got here, but even more to blame is laziness. The expectation that we can get rich by sitting back and watching our houses rise in value – or worse, get even richer by buying a bunch of houses and letting them out. Houses are for living in – if you want to get rich, pull your finger out your @rse and work.

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  • alan

    There will always be hard luck stories. There will always be winners and losers in life. It is not feasible or desirable for the government to always prevent this reality. The trick is to think for yourself and leverage any economic or social imbalance to your advantage

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  • Lets tax profits on property at 95% – the 5% can cover home improvement costs and the costs of moving – problem solved.

    I can’t see many people taking this up though – even on this site – all of us are hypocrites.

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  • So there could be lots of people who thought their houses would be moneyspinners which they could flip to turn a profit but now can’t?

    It’s a ‘mammoth welfare disaster’! Help them somebody! Don’t just stand aside gawping at them in horrified fascination! Throw them some money or something! Oh the humanity etc.

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  • matt the hat

    I agree but it should be 100% tax on all profits minus inflation. Look, I have made a fortune on houses over the years but here’s the thing..I’d rather I hadn’t. When I decide to buy a bigger house, it would be much easier if I could just hand over the difference without worrying about whether it’s going to go up or down. I am desperately searching for a house now. I don’t need a mortgage but I am frozen in activity because I am terrified that it will lose a few hundred thousand pounds of taxed income. Stability would be most welcome. Other countries archive this by having a sensible population. We of course are populated by arsehol*s so we’ll have to tax it

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  • bob1: “A bit of economic brutality might improve attitudes.” “We of course are populated by arsehol*s so we’ll have to tax it”

    Present company accepted of course.

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  • mark wadsworth says:

    @ Matt The Hat – if we had capital gains tax on properties that would make things worse. Nobody would ever move or downsize, landlords with lots of properties standing at a gain would simply never sell.

    The answer is simple – an annual land value tax (to replace as many other taxes as possible, starting with Council Tax, Business Rates, Stamp Duty, Capital Gains Tax, Inheritance Tax, s106 Agreements etc). That would act like a much higher interest rate on land/bubble values (i.e. value of property minus rebuild or construction cost/value) and so keep them low and stable, as well as motivating the council to do everything it can to make an area as nice to live in or do business in as is possible.

    In a few minutes somebody will say “What about little old ladies who want to stay in the family home?”. I’ve answered that one dozens of times.

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  • …excepted. Those spelling malaprops.

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  • Nobody ever spells out what negative equity means, does it mean that if you borrow 125% LTV on £100000 and your property is now worth £80000, you have to pay back £40000 before your lender will consider giving you a 100% at svr? That means a lot of people being repossed doesn’t it?

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  • mark wadsworth: “if we had capital gains tax on properties that would make things worse. Nobody would ever move or downsize, landlords with lots of properties standing at a gain would simply never sell”.

    Of course they would move. Divorce, retirement, loss of income, empty nest etc. People have to move for all sorts of reasons. Would a spinster with a dodgy hip not downsize to a bungalow because of capital gains tax? Before you say it, yes I know she might fear a large tax bill but in most cases the proceeds of the house sale would pay the tax (in the event of a capital gain). I think Matt’s idea is to avoid wild price swings in the future so there wouldn’t be any tax to pay anyway. If a person re-mortgaged to spend all their perceived capital gain and couldn’t pay the tax then there is always bankruptcy. All that would be removed from the equation is speculation and wild price swings.

    As far as landlords: The BTL equation only worked for many because of the possibility of capital gain. Matts scheme would have presented the BTL craze as well.

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  • lets not forget that house price gains were used to leverage the whole derivatives fiasco that has brought the world to its knees. If house prices were stable we wouldn’t be in this mess.

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  • Mark Wadsworth…spot on. Greed and speculation has caused this mess. Things are not perfect in Countries such as Denmark but higher taxes there curb the desire to speculate on property which tends to correct house prises. The tax money made by the council is then invested back into society so naturally little old ladies get looked after. It might take a lot to convince the British to pay taxes {to say the least} so I guess boom and bust will always exist there.

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  • mark wadsworth says:

    Bob1, more flawed maths:

    “in most cases the proceeds of the house sale would pay the tax (in the event of a capital gain)”

    OK, somebody bought a house twenty years ago for £50k and it’s now worth £150k. They now want to change jobs and move to a new town where houses also cost £150k.

    IF they sell and move, they lose £100k, so they can’t afford to sell and move. What’s the rational response? To buy the new place and keep the old place and rent it out. So such a tax would have the effect of keeping homes off the market to buy and concentrating ownership in an ever smaller number of hands.

    But LVT would prevent there being big capital gains in the first place. The house you bought twenty years ago for £50k would now be worth £80k or something. And LVT would encourage people to downsize, it would REWARD you for downsizing rather than encouraging people to gamble on price increases.

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  • mark you’re missing the point AGAIN. With matt the hats scheme the whole point is that there would not be any capital gains and therefore no taxes. Keep up.

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  • mark wadsworth says:

    Bob1, how does capital gains tax prevent there being gains? It would certainly discourage people from realising gains, but does not prevent the gains arising.

    PS I have worked in tax for twenty years, I know more about this than most people, so please do a reasoned argument using logic and numbers and examples and so on.

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  • mark: because it would discourage speculation and a house would revert to being simply a home. Do you remember the bit about BTLers? I said that many of them wouldn’t have entered the market if they thought that there wouldn’t be any capital gains (if the gain was taxed 100% then there would be no gain). The housing boom was largely caused by a fear of not jumping on the ladder. If there were no potential profits then there would be no fear of missing out

    You work in tax!!! Probably explains why I go all hormonal when I see your posts. Only kidding. The truth is I couldn’t give a toss what tax I pay. I pay enough tax to buy a small house every year. LTV isn’t a bad idea. I’d pay it without complaint

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  • Mark Wadsworth says:

    Bob1, yes that is a good explanation, thanks, but you are still assuming that people will respond in the way you expect. They might or they might not. Hmmm.

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