Following the housing market going bust, many first time buyers have found themselves in negative equity
Traditionally it was unthinkable that the value of a home could decline over time. Real estate was the one thing that could be relied on to increase in value. That, after all, is the reason why so many people bought houses and apartments, over the years, in order to fund their retirement. What has happened during the past couple of years has shattered all those dreams as the unthinkable happened; for many people the home they bought is now worth less than what they paid for it.
Many, who purchased a property in 2007, just before the start of the so-called ‘credit crunch’, have become the victims of a poisonous combination of more restrictive lending practices and declining real estate prices. According to a new report from HSBC, while many of these buyers still enjoy positive equity, it will not be enough to cover a 10 percent deposit on a larger home, plus the cost of moving expenses and stamp duty.
The problem has been exacerbated by the fact that the price of the average ‘first-time’ home has dropped faster than that of other types of real estate. The reason for this is that demand is simply not there; fewer first-time buyers can afford a 10 percent or even 20 percent deposit. To make things worse, most lenders have started to charge higher interest rates on these loans or pulled out of that market sector altogether.
The person in charge of mortgages at HSBC, Peter Dockar, says, “These findings highlight the fact that first-time buyers can no longer rely on rising house prices to provide them with the deposit they need for their second purchase. They need to save or make overpayments on their existing mortgage if they want to move up the housing ladder.”
The bank’s research also showed that not all regions of the UK were hit equally hard in this regard. Northern Ireland is the worst off; anyone buying a home there in 2007 would now have negative equity of some £45,000.
London is the only city in the UK where the values of first-time buyer properties have increased since 2007, although by a meagre 1.7 percent. This increase, however, also means that the average second-time buyer will still have to pay some £2,000 after selling his or her home in order to afford a new property.
Things get worse in the South East, where second-time buyers face an average shortfall of nearly £18,000. This can mainly be attributed to the high cost of properties in the region and the fact that the average home will attract a three percent stamp duty when sold.
In the US, where banks often granted mortgages of more than 100 percent of the value of a property, the situation is not much better. House prices will have to appreciate substantially before a large percentage of first-time buyers will return to positive equity.
Despite predictions by various real estate gurus, this has not happened in 2011 and it is unlikely that it is going to happen next year.