Cost of owning crisis as 50,000 slip into negative equity

Homeowners are facing a "cost of owning crisis" because house prices are dropping so quickly that tens of thousands of them are now in negative equity.

The National Institute of Economic and Social Research (Niesr) said that because house prices dropped sharply in August, 50,000 people have found themselves in this situation in the past year.

Last week, Nationwide said that home prices were going down at the fastest rate in 14 years. Compared to the same month last year, when prices were at their highest, prices dropped by 5.3% in August.

The drop was the biggest since July 2009, when the world economy was in the middle of the worst financial crisis.

Negative equity is when the value of a home is less than what is owed on the mortgage. It can make it hard to sell or refinance a home, which means that renters will have to pay more each month when their fixed-rate deals end.

Max Mosley, an economist at Niesr, said, "Mortgage holders across the country have had to deal with Covid, a cost-of-living crisis, and now a cost-of-owning crisis."

Niesr's numbers come from a study of the official Office of National Statistics (ONS) Wealth and Assets Survey.

During the financial crisis, when prices dropped 20% from their peak to their lowest point, and many more people got mortgages with small or even no down payments, there were many more homes with negative equity.

But in the next month, many more households will run into trouble. The Government's independent tax and spending watchdog, the Office for Budget Responsibility (OBR), thinks house prices will drop 10% from their recent peak.

Last year, the Resolution Foundation said that if prices fell by just 8%, 190,000 families would be in debt.

Last month, Nationwide executives told MPs on the Treasury Select Committee that about 2% of their customers had gotten mortgages with deposits of 10% or less; this makes them especially vulnerable to a big drop in house prices.

But Henry Jordan, home commercial director at Nationwide, said in July that he thought anyone who fell into negative equity would only be there "for a fairly short period" before values went back up. He also said this should be fine for people who plan to live in their homes for a long time because house prices are expected to return in a few years.

As a result of repeated rate hikes, house prices are dropping quickly; this is a big problem for the real estate market.

Bank of England data released last week showed that the number of mortgages approved in July was the lowest in five months.

Officials have warned that mortgage payments for about four million people will go up sharply by the end of 2026. One million will see their monthly payments go up by at least £500.

But there are also signs that interest rates are about to peak, making a mortgage shock less likely. This week, Huw Pill, the Bank's top economist, said he might not vote to raise interest rates from their current level of 5.25pc.

Mr Pill said that inflation was still stubbornly high at 6.8%, but he thought keeping rates high for longer would bring price increases back to the Bank's goal of 2% by 2025.