Tue 3rd Jul, 2007
Will falling house prices affect those with secured loans?
There has been a lot of speculation in the media recently regarding the possibility of house price drops across the UK. A new special report by Sharlene Goff of the Financial Times highlights yet another fear for home owners. This new report highlights the fact that after years of warnings, house builders are finally starting to bring in a supply of new homes. However, because the new supply of homes will be concentrated in certain areas and at certain parts of the market, they may have drastic consequences for housing prices in these markets, particularly those who have released equity from their homes through secured homeowner loans.
“Secured loans are a great way for homeowners to build wealth through home improvement,” says Abbi Rouse of online loan brokers, Interfinancial Limited. “However, for households close to their financial limit, a fall in house prices could spell disaster for those looking to sell on at a profit.”
Recent years have seen the biggest housing shortage in the UK since the Second World War. However, with a concerted effort from the building industry and incentives from the government, it looks as if thousands of new houses are finally ready to hit the UK market and relieve some of the chronic issues of under supply. This was supposed to ease the pressures that have been continually pushing up house prices.
However, it has been pointed out by many experts in the housing industry that some of these new developments that will be coming on line over the next year, will cause massive oversupplies of certain types of housing in localised areas. For example, while a particular city as a whole may have an overall shortage of housing, certain suburbs may have a glut of three bedroom semi-detached houses as this is what the developers have concentrated on supplying.
“A homeowner who has taken out a loan to add an extension to their home will be expecting to recoup some or all of the cost when they move,” says Rouse. “Typically these home improvement loans are taken out by those looking to move up the property ladder at some point – homeowners in two or three-bedroom properties.”
What this means is that while house prices in the city as a whole may remain fairly strong, the price of three bedroom semi-detached houses in the local area of oversupply would plummet once they became plentiful. This could be terrible news for homeowners who have chosen to carry out home improvements over moving home. These families may now find their house is worth no more than it was before, making their once cheap loan now an expensive option.
There could become a real fear for home owners in areas that look set to suffer from over supply as it will mean that they run the risk of getting into a negative equity situation. Obviously this will depend on how much they owe on their mortgage and on any other debts that they have secured against their home. However, it does look as if negative equity could return to the UK as a real issue.