Families engulfed by negative equity

Published on Tuesday 21 June 2011 16:23

More than four in five Scottish homes bought since 2006 are now worth less than their purchase price, fuelling fears over negative equity.

House-price falls over the past three years have decimated property values in some parts of Scotland, with many homeowners facing difficulties selling their homes or securing a competitive mortgage.

Of more than 374,000 homes bought in Scotland since 2006, 306,000 are now worth less than the owner paid for them, according to research by property website Zoopla.

The picture is similar across the whole UK, where 3.5 million of the 4.32m homes bought in the past five years are today worth less than the purchase price. But Scotland fares better than many areas, with prices north of the Border typically less volatile than in some parts of the country.

Homeowners who bought at the market peak are the worst affected, according to Zoopla. More than 93 per cent of homes bought in 2007 and 89 per cent of those bought the following year are now worth less than the purchase price.

In contrast, more than half of the homes snapped up in 2009, when prices plunged, are now worth more.

Nicholas Leeming, business development director of Zoopla.co.uk, said: "There is an unprecedented number of homeowners 'stuck' with homes they bought in recent years with the expectation that prices would continue to sky-rocket. And as a result of not wanting to take a loss on their asset, many owners have been unwilling to set realistic asking prices to sell them."

The figures come weeks after Lloyds Banking Group, the UK's biggest lender, revealed about 150,000 of its mortgage customers were in negative equity.

The number of homeowners in negative equity could grow further over the coming year, with house prices expected to continue declining. The average Scottish house price has fallen by about 1,000 in the past four years and is now at the level of early 2007, according to Lloyds TSB's most recent Scottish House Price Monitor.

Estate agent Savills recently predicted house prices would fall in Scotland this year and said they were unlikely to rise before 2013. The latest report from the Royal Institution of Chartered Surveyors found a growing number of its members expected Scottish price falls over the summer, while lenders including Nationwide and Halifax have warned prices are unlikely to rebound over the coming months.

New figures published by the City watchdog yesterday revealed a decline in the number of families falling behind on their mortgage repayments. There were 337,000 families in arrears in the first quarter of this year, down from 360,752 in the same period in 2010, according to the Financial Services Authority (FSA). It also reported a slowdown in the number of new households falling into arrears - down 8 per cent from the end of last year.But Paul Diggle, property economist at Capital Economics, said the FSA's figures, showing a record high in the number of borrowers on variable rate mortgages, underlined the threat that a rise in interest rates could pose to borrowers.

"Given the high level of mortgage debt outstanding in relation to incomes, that could have serious ramifications for payment problems when interest rates do eventually rise," he said.

The FSA's figures also suggest that lenders are tightening their lending criteria once more, freezing more first-time buyers out of the market. Mortgages at 10 per cent or less of the property value accounted for just 1.7 per cent of loans given in the first quarter of this year, compared with a 15 per cent share prior to the recession.