Why falling house prices are not all they’re cracked up to be…
There’s no doubt that house prices have been falling over the last 5 months – in some areas more than others.
Great news some people may think – means property is more affordable for those not on the property ladder. We know that homeownership amongst the young has halved over the last 20 years according to the Institute of Fiscal Studies. For those not yet able to access the illusive first rung of the property ladder a price crash probably sounds very appealing.
But think again, a house price drop, of the magnitude suggested post Brexit wouldn’t necessary realign the house price market in a uniform fashion.
It’s the people who are at the bottom of the housing ladder that are most exposed. That would include recent first time buyers which have seen a rise in numbers over the last year. Due to the punitive second home stamp duty surcharge on private investors and landlords and the less attractive income tax treatment of landlords, first time buyers face less competition for starter type properties. As B2L landlords withdraw from further investments, first time buyers are picking up these properties.
This group of buyers tend to have a high loan to value ratio so a drop in values will quickly tip them into negative equity – trapped in homes that are worth less than the mortgages they took out to buy them.
People who have managed to scrape together deposits to get on the ladder would suffer. The wealthier and often older home owners would be largely insulated from the effects of negative equity. This group tends to have higher levels of equity in their homes or are even mortgage-free. They can withstand the financial blows dealt by a falling market.
Far from being the magic pill to solve the issues of unaffordable housing in Britain, it may be the very people at the bottom of the property ladder who need the most help that are most at risk of getting burned if prices are to fall.