Negative equity

The FT looks at the risk of a rise in negative equity and concludes that because of the relatively modest offerings by banks and the lower proportion of first time borrowers, there will be less negative equity than there was in 1990.

This may come as a surprise, given the problems that banks have encountered following their profligacy at the height of the housing boom. But the reason is simple. Unlike in the late 1980s, they have sought to gain a competitive advantage by offering low mortgage rates, rather than by seeking to out-do each other by offering ever bigger mortgages as a proportion of a home's value.

Bank of England figures last published in 2005 show that in the late 1980s more than 40 per cent of all mortgages - for house purchase and remortgaging - had loan-to-value ratios of more than 90 per cent. In recent years that number has halved to about 20 per cent.

House purchases by first-time buyers, the group that tends to have by far the highest loan-to-value ratios, were also much lower. There were 750,000 in 2006 and 2007, compared with 1.04m in 1988 and 1989. Working out the strength of every mortgage in the UK is difficult.

There are no data on the exact number of mortgages outstanding, the initial price paid and the subsequent movement in house prices. But the FT estimates that 350,000, or 2.8 per cent, of people owning their own homes would succumb to negative equity if prices were to fall 10 per cent.

If prices fell 15 per cent, the FT's estimate is still that only 5 per cent of mortgagors - 2 per cent of all households - would be in negative equity.

Kate Barker, a member of the Bank's monetary policy committee, arrived at the same figure in a speech in February that was based on a Bank survey.

They are also in line with the figures published by some lenders in their annual accounts. HBOS, the country's largest mortgage lender, says only 4 per cent of its stock of loans has a loan-to-value ratio greater than 90 per cent, while Nationwide, another of the country's big four mortgage lenders, has only 1 per cent of its mortgage book in this category.

Gary Styles, strategy, risk and economics director of Hometrack, says that many scare stories about negative equity use figures that are "very inaccurate and far too high".

"Most of the largest lenders in the UK have very few customers with less than 10 per cent equity in their properties and several of the biggest players have only around 2 per cent of their existing mortgage customers with less than 10 per cent equity," he said.

Housing and consumption

Willem Buiter looks at the effect of housing on consumption. Amidst it all

Likewise, some current home owners may be planning to ‘trade down’ later in life, for instance when the family home gets replaced by a smaller property when the children leave home, following retirement or following the death of one’s spouse. For them the fundamental value of their endowment exceeds the present discounted value of their current and future planned consumption of housing services. Against that, there are also persons planning to trade up in the housing market.

This is probably a most important point. Given the number of people that seem to regard their property as their pension. There is an implicit belief that there will eventually be a mass trading down. Presumably, this will concertina the gap between family and smaller homes.

The other important point is

The argument for an effect of housing wealth on consumption over and above the pure wealth effect, is that housing wealth is collateralisable. Households-consumers can borrow against the equity in their homes and use this to finance consumption. If they are otherwise liquidity-constrained or credit-constrained, a boost to housing wealth would boost consumption by more than the pure wealth effect.

Buiter plays down this effect. However, outside credit cards, which are notoriously expensive, this is the cheapest and easiest way for the average person to access credit and liquidity. A rise in house prices provides a significant increase in the abililty to borrow, particuarly if, as is usually the case, it corresponds to an increase willingness on the side of financial instutions to offer credit.