Many people will remember the plight of the early 1990s when many homes were in negative equity following the crash in house prices, people were unable to move home simply because they owed more than the value of their homes. Today the issue of negative equity is much worse, and here is why.
Firstly it is estimated that around 1 million homes are in negative equity, these are in the worst situation. But even if you have 10% or 15% equity it is still almost impossible to move to a similar (or higher) price property unless you have cash savings as mortgages typically require at least 15% equity.
According to John Charcol the number of homes with less than 10% equity is around 2 million, and the number of homes with less than 15% equity is around 2.5 million. That is around 2.5 million homes were people are effectively unable to sell and buy another property, in effect causing the market to stagnate.
The problem gets worse when you consider those who hold sub-prime or self-certificated mortgages, which is an estimated 1 million properties. As it is virtually impossible to obtain a sub-prime mortgage and at the very least challenging to obtain a self-certified mortgage, this adds another 1 million properties to the list where people cannot afford to move home.
Overall this equates to a staggering 3.5 million homes where people cannot move, that is around 15% of homes, almost 1 in 6 that simply cannot afford to sell up and buy somewhere else to live.
The solution is not only about property price recovery, it is about bank lending, unless banks start to lend at higher LTVs (Loan to Valuation) then it may be some time before the property market can get back to a normal buying and selling activity.
