A stark but inevitable warning has been issued to recent homebuyers: house prices are now so high that there is a good chance that homes will soon be worth less than the mortgages taken out to buy them.
The stamp duty holiday has created huge demand in the UK housing market. But with supply levels low, there aren’t enough houses to satisfy this demand and so house prices have gone through the roof.
These price hikes have been so dramatic and happened so swiftly that people who are buying homes today are at risk of suffering negative equity in the future. This is because prices have risen more than 10% in a year, extraordinary growth that simply is not normal or sustainable.
This means prices will inevitably start to fall back to what we might call a ‘normal’ level. In other words, houses that have seen their value rise by 10% since the pandemic could very quickly lose that 10% as we move forward.
This means that, when today’s buyers look to sell their homes in the future, there is a real chance they will be worth much less. This is a particular concern for people taking advantage of low-deposit mortgages, like the 95% government-backed mortgages announced in this year’s Budget.
If a buyer takes out a mortgage on a home that is valued at £300,000, but then, over time, the value decreases to £250,000, the buyer is paying off a mortgage worth £50,000 more than the home they are paying for.
This is negative equity and it’s becoming a very real risk for thousands of people who have bought homes over the past year.
The preferred alternative is for a house to increase in value so that, even if you want to sell it before paying off the mortgage, the sale of the house will not only pay off the mortgage but also leave a little extra left over as profit from your property investment.
Negative equity is something that all prospective buyers should be aware of while prices are as high as they are – just because prices are high, it never means they’re going to stay high, and given that it’s unlikely that we’ll again see similar growth to that we have over the past year, the eventual losses may be impossible to claw back.
Our advice: if you want to buy a home in today’s market, do not let the threat of competition force you into paying more for a property than you feel comfortable with. A significant number of homes are selling for far more than their asking price because buyers are getting desperate to beat the competition. But this could lead to real trouble down the road. Be smart and know what you can and cannot afford.