Negative equity is not something the vast majority of homeowners need to worry about.
We calculate that a nationwide 10% reduction in house prices from today’s levels would result in very few cases of negative equity for mortgaged sales up to the end of 2021.
That’s because most buyers are using the equity within their existing homes to help them to secure their next ones.
Only buyers who recently purchased a property with a high loan-to-value mortgage might be at risk. And even then, the situation may only be temporary.
Mortgage rates stuck at 6% would lead to price falls
If mortgage rates were to stay above 6% for the majority of 2023, which we now believe to be much less likely, then UK house prices would need to fall back in order to reflect the hit to the purchasing power of those using mortgages.
That said, strong UK-wide house price growth over the pandemic has added to the equity buffer for homeowners.
In fact, most new borrowers have not relied on large mortgages to pay for their homes.
Instead they have used savings, or existing equity, to help them to secure their new properties.
That means there is a huge equity buffer to absorb any reductions in sale price, and few people will experience going into negative equity.
Low exposure to negative equity from 10% price falls
A 10% decline in average prices would wipe out a sizable proportion of the value gains made over the pandemic.
Those losses would be most keenly felt in markets like London and Scotland, where lower price gains have been made since 2020.
However, a 10% decline would only result in a small handful of negative equity cases. And those would mainly be seen through purchases made in 2022 with high loan-to-value mortgages.
This highlights how the housing market has been increasingly driven by buyers using their existing equity, rather than those reliant on high loan-to-value mortgages.