Planning for the future when you're in negative equity
It appears every week: house prices rising, house prices stalling, prices flatlining and there will be a housing crash. These headlines are pumped out in the media at a national and local level. The variances of the housing market across the United Kingdom allow for the headlines. The two headlines below, which were published within the same week, claim house price growth is the slowest in six years and house prices are rising at the fastest rate for two years. Which one is correct?
The regional variance of what has happening in the housing market allows for clickbait headlines. The problems that are within the housing sector and exacerbated by various government interventions e.g. help to buy, have distorted the housing sector and the problems are not being addressed.
In certain parts of the country since 2007, house prices have increased and in other parts they have regressed. But it does not help landlords looking to exit the market, or those looking to enter the market or increase their portfolio. Is the property you own or are about to buy going to increase in value or will it decrease?
Obviously, the prudent landlord will know the local market and they should know what the house prices are doing in an area. A quick look on Rightmove will show the historical prices in an area and what has happened to the market. But what about the future? What does the person do who is in negative equity?
This opens an area which has been absent from public discourse, and in which there is a significant challenge for the housing market. In some situations, the house prices of today are below that of the mid-2000s. In some situations the houses are worth less than what many landlords and owners paid for them.
With the shadow of historical low interest rates coming to an end and a global slow down no one knows what will happen over the next few years to the housing sector.
But many properties and individuals are already in negative equity. This poses the question, how will someone who has negative equity exit the sector? If the property is sold today, it would create a loss from which the landlord would have to cover the difference. While there are those who will say that is how business should work, it could create a bigger problem.
What would happen to the sitting tenant if the bank/building society sold the property? How will the other properties in the area react? While we do not support the bailing out of those that have made bad business decisions, a collapse in house prices in an area would drag others into the problems and cause huge social problems.
There is a cohort of landlords who have property that have 100 percent or more interest only mortgages on properties that have not increased in value since purchase. In extreme situations properties have even decreased in value.
So, what is going to be done? How will these properties be sold and landlords exit the market? Will the government support those landlords who are in negative equity just like the dividing of Northern Rock into a good bank and bad bank? Can landlords dispose of their properties to a government agency? Will these individuals still be liable for the debt? They should be, why should they walk away? But what will happen to the tenants? What will happen to the whole streets, areas and communities who will be affected?
A plan is needed to tackle the problem that is currently hidden, but is just lurking under the surface.
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