Negative equity nightmare for Scottish homeowners

Thousands of Scottish homeowners are unable to move because the value of their property has dropped while deposit demands have increased, a report out today warns.

So-called “second steppers” north of the Border are “bearing the brunt” of what remains a stagnant housing market, according to Bank of Scotland, with no improvement over the past 12 months in their ability to secure a move.

Second steppers are those in their first home but hoping to take the next move up the housing ladder.

The environment for second steppers has worsened dramatically in recent years as it has become increasingly difficult to sell their home or fund the deposit needed for a new one.

Previous Bank of Scotland research found that more than two thirds of  first-time homeowners wanting to move again were unable to do so, causing a bottleneck in the housing market.

Second steppers have been hit by a combination of stagnant earnings, house price falls and tightened mortgage criteria, according to Nitesh Patel, housing economist at Bank of Scotland.

“Even though many of Scotland’s second steppers won’t have bought at the height of the market, many are still going to struggle to make that move up the housing ladder,” said Patel.

“House prices have been falling or remaining flat for the past four years, and as a result many first-time owners in Scotland are still in a very low equity position.”

The average first-time homeowner currently has housing equity of just 2 per cent of the typical second stepper home, down from 41 per cent in 2006. That covers just 40 per cent of the average cost of moving in Scotland, leaving second steppers faced with a huge challenge to secure the deposit needed to buy their next home.

Many are in negative equity, with their home worth less now than when they bought, despite more modest house price falls north of the Border than in many parts of the UK.

Yet the average home mover required a deposit of £47,311 last year, nearly five times the amount a decade ago.

The issue adds to the problems faced in other areas of the housing market, creating an obstacle for first-time buyers in particular, Patel warned.

The report comes days after it was revealed that more housebuilders have signed up for the MI New Home scheme, the Scottish Government-led initiative aimed at making it easier for first-time buyers to get on the housing ladder.

The scheme is based on guarantees offered to lenders and builders by the Scottish Government.

In return for offering 95 per cent loan-to-value deals, the lenders in the scheme benefit from a Scottish Government commitment to cover a certain amount of any losses they make on that lending, while builders get a similar guarantee.

The idea is to improve the availability of mortgages requiring deposits of just 5 per cent – the average first-time buyer north of the Border is currently asked  for a down-payment of around 20 per cent.

Five more Scottish housebuilders are now taking part in the scheme, taking the total to 20, according to Homes for Scotland, the industry trade body.

Only two lenders – Royal Bank of Scotland and Nationwide – are currently on board, but Bank of Scotland/Halifax are reported to be closing to joining.