Increase in house prices eliminates negative equity

By March 27, 2018Articles
Research shows that thousands of house owners and mortgage holders have been lifted out of negative equity thanks to rising property prices. The number of houses in negative equity is assumed to be only a quarter of what it was at the end of the crash.

Property prices are rising rapidly in Ireland

A 2017 report revealed that house prices would continue to rise for the next five to ten years unless drastic action is taken. This concerns mainly Ireland and Dublin. Economists predict that house property prices in Dublin will increase at a faster rate than the rest of the country. While high property prices may be a curse for some, it is a blessing for many others, especially those in negative equity.

The improvement in the economic environment and the rise in house prices reduced the number of borrowers in negative equity.According to the Central Bank, the decline in negative equity is a boon to individual borrowers as well as to the overall financial stability of the economy. When people are lifted out of negative equity, their spending and consuming confidence is high.

What is negative equity?

With the nationwide fall in house prices, many families found themselves owing more on their home mortgages than their houses are really worth. This phenomenon is known as ‘negative equity’. Normally, a property is in a negative equity if its price is lower than the mortgage secured on it. This is caused by falling property prices. People will not easily know whether they are in negative equity unless they contact their lender and an estate agent to value their home.

According to the Central Bank of Ireland, negative equity is still a prominent feature as some house prices are still 23.7pc below their 2007 peak. This affects especially people who bought a house after the crash when prices were falling. The highest rate of negative equity was observed among borrowers who bought their properties in the 2005 to 2009 period.

Negative equity is important

In many cases, negative equity is not a problem. Some people in negative equity will not be affected by price falling or rising. Researchers validate how negative equity does not lead to default in every case. They argue that default rises when negative equity happens at the same time as a cash-flow problem, such as illness, divorce or job loss. That is, it occurs when borrowers will not be able to repay their debts.

Negative equity has dire consequences

Even though negative equity does not affect borrowers in some cases, its harmful consequences cannot be ignored. With negative equity, many families find themselves trapped on expensive mortgage rates. There are many people who are even unable to move home. This can adversely affect the economy as households cannot sell properties.

Psychological turmoil happens

This phenomenon leads to psychological turmoil. Negative equity has a serious impact on the psychology of consumers. They are prone to spend less as debt repayment is their topmost priority. It is known as the ‘wealth effect’ and Ireland is one of the worst performing countries in this aspect. Furthermore, you cannot switch to get a bet deal if you are in negative equity. This means that you have to accept whatever rate you are charged by your banks or lenders.

Negative equity will decrease further by 2020

The Economic and Social Research Institute (ESRI) predicts that thanks to the rapid rise in house prices, negative equity could be wiped out by 2020. The number of households in negative equity was 160 000 at the end of 2014 and this figure is expected to fall further in the coming years. On the other hand, there were 75 000 mortgages in the third quarter of 2017. This equates to just 9.6 percent of all home loans. The ESRI believes that consumer spending will be boosted as a result. Consequently, housing mobility will be enhanced.

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