- A 'typical' homeowner who bought as recently as 2004 has an average "equity cushion" of 48% - prices would need to fall by almost half before value of the loan exceeded property value*
- Average home bought in 2000 with average deposit of £27K has provided a 58% buffer, based on today's prices
- The average London property purchased in 1995 would need to depreciate by three quarters (73%) for the owner to encounter negative equity
"As house prices soften many commentators understandably warn of the potential of negative equity in some parts of the market. However it is also important to look at the broader picture. Over the past decade homeownership has delivered fantastic returns for many borrowers and we would need to see unprecedented falls in property prices for the average home owner to be severely impacted. Home owners who purchased their property just four years ago for instance - even without a deposit -- have an equity cushion of almost 50% before the value of their home loan would exceed the property value."
Gerry Bell, Head of Mortgage Marketing, GE Money Home Lending
As the effect of falling house prices continues to be debated, analysis from GE Money Home Lending, one of the UK's leading specialist lenders, reveals the extent to which house prices would actually have to drop for average borrowers - who purchased a property over the past 13 years - to suffer negative equity.* GE Money Home Lending has identified the 'equity cushion' that should insulate home owners from experiencing negative equity.
According to the analysis, a homeowner who purchased a property with an average deposit on an interest only basis as recently as last year, has a cushion of equity which would mean their house price would need to fall by a fifth (19%) before they would experience negative equity. For those who bought in 2004 and paid the average deposit of £50K, rising prices have resulted in an equity buffer of some 48%.
The picture for the average borrower who purchased in the 1990s is even more reassuring. A householder purchasing a property on the same terms in 1995 would need prices to depreciate by almost three quarters (72%) for the value of the property to be lower than the finance owed. Even as recently as 1999 the average home cost less than £100K, so a typical borrower has an equity bulwark against potential losses, which means the property would need to experience 63% depreciation to be in negative equity.
Regional findings
Interestingly, property owners in the north of England and Wales that purchased their property in the year 2000 have a greater cushion of equity than home owners in the South. A homeowner from Wales who bought their property at the turn of the century has an equity cushion equal to over half the value of the home. Prices in Wales would need to fall 53% before experiencing negative equity, compared to a 43% drop in the South East.
However, looking back to 1995 figures reveal that it is Londoners purchasing a property that are the most protected from negative equity. A Londoner buying in 1995 would need house prices to fall 73% before they experienced negative equity, compared to 65% in the North and West Midlands. This changing trend is explained by the rapid increase in house prices in the North of England and Wales since the turn of the millennium relative to the rest of the UK.
Bell continued:
"While we have witnessed depreciation in house prices over the last year, the fall in property values has been relatively modest compared to the significant inflation over
the past decade or so. Taking into consideration the average deposit borrowers have paid and assuming no additional lending of overpayments, prices would need to fall by over a third for the average home owner who purchased their property five years ago to experience negative equity.
"Ultimately the concern in the current marketplace is for the small number of borrowers who put down a very small deposit who may now be feeling overstretched. However for the vast majority of UK consumers, the historic growth in the market has provided a welcome cushion against these falls."
Corporate Communications
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