170,000 homeowners face negative equity

Article source: Niall Brady - www.timesonline.co.uk

170,000 homeowners face negative equity

A big percentage of those who jumped on to the property ladder between 2005 and 2007 will find that the mortgage bubble has burst and will be victims of falling house prices and unfortunately, end up in negative equity come the end of next year, that is unless the trend of falling house prices stops. These prices have been falling at a rather high rate. This is according to a report released recently.

The chief economist at Goodbody Stockbrokers is anticipating that come the end of next year, the prices of houses will have gone down by 30 percent from their peak in the early part of 2007.

These changes in the house prices will leave many thousands of homes owners with more money owing on their mortgages than their properties are actually worth; a situation referred to as negative equity. In total, there will be approximately 170,000 home owners with outstanding mortgages worth more than the value of their homes. Those owners who purchased their properties between spring 2006 and summer 2007 are at a greater risk.

A slow down in the sale of properties has made it almost impossible to estimate the scale of the slump, but, according to O’ Leary, the values have already recorded a 20 percent decrease. Sherry Fitzgerald, the estate agency, stated that the house prices have dropped nationally by 17 percent since the month of June 2006; in comparison prices in Dublin have fallen by a worrying 23 percent.

Negative equity is a big problem for those borrowers who want to move home or those who become victims of mortgage arrears. This is because they usually don’t have any other option than selling their houses at a loss.

Mr O’ Leary said that it would be an issue for those who can not continue paying for the mortgage because they can’t afford to sell. He also said that it would be a problem for those who have not secured a job and would be a bigger problem as the level of unemployment will continue to rise.

More than 6 percent of the labour force is already without work and according to Dermot, this percentage of unemployment is expected to rise up to 8 percent by next year. Those who borrowed most or all of the value of their properties homes are especially at risk.

According to the department of the Environment, one out of every three first time borrowers used 100 percent mortgages to get on the ladder in the year 2006. This however recorded a big drop last year as banks started changing their lending criteria for these loans. Lenders have now been left with no other choice than to abandon these loans completely.

It was also noted that the already existing home owners borrowed heavily in order to climb the ladder in 2006 during the period of housing boom. 17 percent of those who moved to bigger properties the year 2005 are said to have had a loan to value ratio of more than 90 percent of the cost of their new homes. Even as the market began to record slower growth and falling house prices in the year 2007, a staggering 15 percent of those who were going for a bigger model still had a loan to value ratio of more than 90 percent.