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In the early 1990's the housing market in the UK crashed.
For many people, the value of their house was now less than the mortgage outstanding: this is called negative equity.
What does negative equity mean?
- You cannot easily move house because you have to pay back more to the mortgage lender than you get from the sale of the property.
- You cannot easily raise money against the security of the house because there is no equity for the lender to use as security.
How can you get around negative equity?
- You can use savings you have to pay off the negative equity
- You can sometimes transfer the negative equity to the new property. If the housing market is likely to recover in a reasonable time, and the property is one that is likely to recover quickly then some lenders might see this as less of a risk.
What causes house prices to crash?
When demand outstrips supply, prices rise. For them to fall the opposite is true - supply outstrips demand.
When demand drops it is because house prices are too high or interest rates too high or both. It comes down to affordability and if people can't afford to buy a house then they wont be able to. This means prices have to come down to make them affordable or interest rate fall so low that the repayments are affordable.
How do interest rates affect the housing market?
With low interest rates people can afford to take on more debt. Because mortgage rates are the lowest rate of borrowing but also the largest value, the effect of a change in interest rates is more noticeable.
For example if a mortgage taken out at 4% increases to 5%. Only a 1% rise but in real terms the interest payments for that mortgage have gone up 25%. In real numbers terms:
Mortgage of £100,000 over 25 years
Interest payable @ 4% = £333.33 per month
Interest payable @ 5% = £416.66
As soon as people cannot afford their mortgage payments they are in trouble. The choice here is to sell and rent or downsize, and do it fast. As soon as this starts, a housing crash might be around the corner.
If there was a housing market crash how long would it last?
The late 1980's/early 1990's crash lasted over 4 years before prices started to recover. There is no general time frame, many factors are taken into account.
Additional Reading:
Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.