A Warning People May Not Want To Hear - Negative Equity Looks Increasingly Likely With The Looming Recession

14th December 2022

Negative equity problems have faded from many people's minds, because the last negative equity crisis was in the late 2000s, and the one before that was in the early 1990s. Around 345,000 homes were repossessed during 1990 and 1995 as a result.

The tendency is to push it to the back of the mind and hope for the best. But rising interest rates combined with wages not keeping up with the cost of living may soon drive us back to those unfortunate days.

House prices are already falling in some places and recession will add to the pressures on household incomes. Buyers may be unable to afford to move or some may not be in employment. Whatever the reasons more will find it to difficult to afford to buy.

The report, An intergenerational audit for the UK published last month highlights the risk to homeowners.

Straight out of the worst of the Covid-19 crisis, the UK has seemingly entered a new phase of economic turmoil. The current cost of living crisis is already having devastating consequences for people of all ages and, while the impacts are expected to be particularly acute in the coming months, this is no longer expected to be just a ‘winter crisis'. Instead, UK households face a deep and extended squeeze on their incomes.

This year, inflation entered double digits for the first time in four decades. Households are grappling with rising prices of energy, food and other essentials. At the same, and despite a tight labour market, wages have not kept pace with inflation, so the real value of take-home pay has been falling.

The Bank of England has responded by rapidly raising interest rates by more than 2 percentage points in the last year. Even ignoring the recent market disruption related to the September mini-budget, expectations of higher interest rates have led to higher mortgage payments for those renewing their mortgages or on variable rates, and many more households face higher mortgage costs in the coming months and years as fixed term deals come to an end. At the same time, higher interest rates have already depressed UK equity prices, and further adjustments in asset values are expected: in particular, a fall in house prices.