Mentally preparing myself for negative equity and 40% price drop due to Covid 19 recession. Could anyone share their experiences of negative equity

[Desiringonlychild]

DH and I bought a 2 bed London flat for £392k last September with a 15% deposit i.e. we owe the bank £330k. Technically we are planning for 1 child so we could theoretically ride this out and not stomach the house price crash.

We are on 5 year fixed term mortgage and we were planning to overpay £10k every year (that was our initial plan. Based on regular mortgage payments and (this is a big if) overpayments, we should have 40% equity by the time it comes to remortgage. But there is a high chance we wouldn't. Are there any issues with being in negative equity that I haven't thought of? Thanks

P.s. I love my flat and the area and it's so much easier for me and hubby to wfh from this flat than at his mum's place. So in a sense, I don't regret. Plus home owners get mortgage holidays unlike renter's who get 3 months notice for eviction and still have to pay back all that rent (unlike homeowners who can spread out the interest over the course of the term).

We had friends in negative equity. They got a £10000 negative equity on a flat purchase of around £50000. They were allowed to carry the negative equity with them as a debt.

If you plan to stay put, then don’t worry, until you want to move. Also, a bank is more likely to remortgage if you have been paying regularly.

Don't worry about things you can't change

As people have said, does vary by area. We are in London and bought our first place together in summer 2007, market peak. Still sold it for a lot more than we paid 7.5 years later. One of the agents who valued it said the market was a bit slow 2008-09 but otherwise prices kept rising really.

OTOH, realistically any collapse now I would imagine would be worse than 2007-8, I think this is far more costly to the world economy than the cyclic fall then.

We just bought in September..awful rate as self employed. We hoped to remortgage in 2 years time for a better rate. We are fucked aren't we.

@FiveShelties he does but as a property developer in his late 50s, he has access to far more cash and can therefore take on 50% mortgages. Which I can't. Therefore he only buys during downturns really. I am the opposite, 28 year old first time buyer with limited savings.

Apologies if I am wrong, bit you seem to have got the 40% figure from the banks withdrawing mortgages for ltvs over that value?

Firstly, I thought the banks had only done this because at higher ltvs they have a high chance of having to go to the property, which they obviously can't do at the moment. Lower ltvs are more commonly valued remotely (as lower risk).

Secondly, percentages don't work like that, they are relative to the specific terms of the calculation.

@MaJoady yes that's why they stopped the high LTV mortgages..also because the few staff they had are too busy processing payment holidays. But I don't see them wanting to put those mortgages back on the market.

If you think about how many people have lost their jobs and how 20% of small businesses don't have enough funds to last 3 months, its hard to believe property prices wouldn't crash in a.significant way.

It's a really interesting conversation, and I know on Mumsnet I'm probably going to end up sounding like a broken record on different threads

And it's such a difficult thing to get perspective on, because the media tends to only report the negative. But brands like Laura Ashley, Debenhams and Carluccios were failing for a long time and were probably going to go bust anyway (no healthy business fails in a week).

The airline industry is in chaos, yes. But look how Rolls-Royce, Airbus, JCB and many of their suppliers are now making ventilators. Where I work (in manufacturing) is also busier than we have been for two years and we don't sell anything related to ventilator manufacture. China is currently buying us out, with huge orders as they come back online.

One of the things we often talk about is the lack of affordability of houses in the UK. There is a huge section of people who will never be able to afford a house. This is NOT a good thing (obviously), but it's effect purely on economic models is an interesting one. You can effectively take those people put of consideration in some house price models. In the simplest case, where supply and demand are the largest factors, you can remove the people who couldn't afford houses anyway from the calculation. IF the people who are losing jobs are solely within this group of people, the house prices don't change, bar a pause due to the uncertainty.

Now, in real life it gets more interesting, because people get involved (and they do unpredictable things). The supply & demand model (although it seems to have mostly bourne out during Brexit) is not accurate nor complex enough to be real. And we can't predict the incomes of those losing their jobs.

@MaJoady those people who don't own their homes, they must rent their home. And in a recession, finding a new job after losing your job isn't that easy. And if a renter can't pay his rent, he gets evicted eventually. Many landlords can't cover the mortgage without rental income which means that they too would be forced to sell.

In London, there are a lot of AIrbnb landlords suddenly unable to let their properties to tourists. A lot of them are over-leveraged and will not be able to afford to keep their properties empty for three-four months. They'll default on their mortgages. Some of them own 10s of properties each.

Hundreds of new builds have been coming onto the market - some sold to off plan foreign investors, but not all of them. The ones coming on now will be coming into a global recession. And this is at the end of a terrible period in general for BTL landlords because of tax changes.

So I think new build flat prices and shoddily converted studio/one/two bedroom period flats in poor states of repair/bad neighbourhoods could well tumble. The ones usually bought/sold by dodgy landlords. But I was even expecting that before COVID hit.

For large period flats & houses in nice areas; those could well fall too, but maybe not significantly. Even a 25% drop would not actually that significant - it just takes us back to where we were five years ago, and five years ago London property was already hugely unaffordable.

(From a Guardian article today: "On Edinburgh's Princes Street, for example, there are 209 Airbnb listings on a road of just 494 homes." Almost all of those homes will now be empty. They are all going to come onto Rightmove at once, with very little demand as no one is moving. So it could in theory have quit a big impact.)

Barclays are insisting on 40% ltv because their centres in India are lockedown and now one is able to work. They cant handle an increase in work load. It's nothing to do with house prices...

40% sounds quite possible but you sound in a good position. Are your jobs secure?
Another factor in house price drop (alongside decimation of economy at current rate) is the high death rate in the elderly - lots of new houses on the market in 6months to a year, just as everyone's jobs are fucked.

@Dazedandconfused10 I did mention earlier that I am aware of why Barclays pulled all their high LTV mortgages. However, as house prices drop, I don't quite see them wanting to offer high LTV mortgages again. The banks were offering mortgages to riskier buyers including first time buyers with tiny 5% deposit, because they were frustrated that their sales volume were nothing like pre 2008 sales volume. However, one thing that is interesting is that the majority of buyers with minimal deposit is actually in the north (31% in the north Vs 16% in London). I guess that is because having a tiny deposit on a £400k London property would mean that you are earning in the £80-90k joint income region to afford the big mortgage and someone who has income in that region has to be pretty bad at saving to only save £20k as a deposit. Also apparently 50% of the people in the north have less than £2k in savings.

@Desiringonlychild, it’s not about being “pretty bad at saving”, but you save to your means. My partner and I live in the north, two kids and have a combined income of around £100K, when you take into account rent and nursery fees that’s nearly £3K gone before usual bills and savings. We aren’t bad at saving and I’m sure there are loads of other people out there in a similar position.

@Daphine2004 yes I am sure everyone has reasons as to why they only have 5%, 10%,15% equity. Like my reason for a tiny 15% deposit was that I saved for 3 years and then desperately wanted my own place so I could start planning for a baby. And yes I knew 15% equity was very low but thought that I maybe had a bit of time to overpay till I built up 20% equity. In the past when brexit was the main issue, I did not think that prices would drop more than 20%. Right now I would honestly be very relieved if prices only dropped 20%.

I guess it is what it is.

www.theguardian.com/business/2020/apr/06/house-prices-will-not-fall-far-despite-lockdown-says-study

Today's Guardian article (with a very misleading headline!) will probably be of interest to those on this thread.

I have to say, I'm surprised to see the reduction forecast being so low! I haven't been able to find the report online, and only the guardian seems to have picked it up so far.

For what it's worth, I think that the 3% is probably a nationwide figure and will mask higher drops in areas (such as Edinburgh & London) with lots of Airbnbs.

I live in a fairly rural county with minimal Airbnb business, so it's unlikely to cause major drops around here.

As for rental evictions causing drops, the effect of that will be delayed and is dependant on how the economy comes back after CV. It takes a fairly long time for a tenant to be evicted and people will keep paying rent for as long as possible for them to keep their home (including using savings etc). Added to that, landlords won't sell in a decreasing market unless thet have too and the length of time they have to get new tenants depends on the size of the mortgage compared to rent they have been getting. So again, unlikely to flood the market all at once. Plus, there will still be the usual boost demand to rental prices in Sept as graduates etc enter the market.

To me, all this points to an increasingly localised property market, where house prices are going to fall more significantly in areas with a higher % of renters, tourists and low equity properties (which tends to be where house prices are higher)

Lots of AirBnB's are changing to the "normal" rental market, and places like London/Edinburgh will always have a tourist market, so it will pick up again.

There's still the problem of supply & demand, with not enough houses available- that won't go away - there is a housing shortage, irrespective of Covid-19.

Places like London will maybe have a correction, though.

Unfortunately over the past several years people have had a fear of missing out from not getting onto the property ladder and so have taken out maximum amount banks will lend for 35 years with 5% deposits, low interest rates have made the problem worse, borrowed maximum from help to buy schemes, raided the bank of Mum and dad, banks have introduced guarantor mortgages in a desperate bid to get more people onto the property ladder, they have done their research and they know alot of people are living at home for longer due to the extortionate house prices and will quite happily put adverts on TV telling them how easy it is for mum and dad to put some their their savings as a loan and get their kids to move into an overpriced 1 bed flat where they will now be stuck in for the foreseeable due to negative equity, since help to buy was introduced in 2014 House prices have been in a massive bubble and that bubble is about to explode big time.