King's Comments Stoke Negative Equity Fears

Signalling more gloom for the UK housing market the Governor of the Bank of England, Mervyn King, told the city today that it is “impossible to judge” how high interest rates will have to go to bring down inflation to the Government's target of 2%.

The prospect of higher interest rates puts yet further downward pressure on house prices already badly hit by the shortage of liquidity in the money markets that has left thousands with debt exceeding the value of their home.

With unemployment rising, at a time when the cost of living is going up fast, more and more homeowners are running into financial difficulties. According to a survey by the housing charity Shelter, in which 7000 people were questioned, about a quarter of homeowners say that housing costs are causing them “stress or depression”.

The combination of higher mortgage rates and the banks making it harder to borrow money to remortgage is compounding the problems homeowners are currently facing. The Shelter survey suggests that as many as 7 million of Britain’s 27 million homeowners are suffering as a direct result of the collapsing housing market. The Shelter survey also suggests that a staggering 3 million people have sold possessions to pay for housing costs.

Many having bought at the top of the recent property bubble using 100% plus mortgages, are now saddled with negative equity. Investment bank Morgan Stanley speculated in the Telegraph earlier this year that 1.2m British homes could be in negative equity before the end of 2009.

Put simply the availability of instant negative equity mortgages in the run up to the credit crunch has needlessly exacerbated the situation leaving thousands nursing unexpected losses.

Halifax Bank of Scotland (HBOS) who claims to have a 20% share of household mortgages said it expected house prices to fall by 9% this year with the number of transactions down a whopping 45%.

“The housing market is not a great place to be right now. When that market has bottomed out HBOS shares would bounce strongly, but that is some time off yet.” says Alex Potter, banking analyst at Collins Stewart reported in the Financial Times this morning.

The fear is that as prices in the shops rise there will be increasing pressure on employers to raise wages which will stoke inflation further and prevent the Bank of England from lowering rates. We will have to wait and see how the labour market reacts to the current inflationary trend, but as real take-home pay is steadily diminished by inflation pay restraint is increasingly unlikely.