Tag Archives: negative equity

We’re in the Shapps!

House building in the United Kingdom has slumped to a 90-year low. Home ownership is predicted to slump to  approximately 65%.  The proportion of people living in owner-occupied homes is forecast to fall to 63.8% by 2021, down from 72.5% in 2001 and from the mid-eighties high of 74%.

According to economists, house prices are set to soar by 21.3 per cent over the next five years whilst rents are set to rise by up to 20%.

In some parts of the United Kingdom, 16% of home owners owe more on their mortgage than their property is worth.

Housing minister Grant Shapps said: “The trebling of house prices in the 10 years from 1997 has locked too many out of owning their own home.

“I want to see a period of house price stability so that more homes become affordable, but I am also determined that we pull out all the stops to give hard-working first-time buyers the help they need.

“That’s why I’ve held summits with lenders to encourage them to do more to help people take their first step onto the housing ladder, and I’ve launched the First Buy Scheme as a valuable alternative to the Bank of Mum and Dad for those struggling to get together that much-needed deposit.

“But we also need to get Britain building again. That’s why I’ve announced plans to release thousands of acres of public land for housebuilding.

“Despite the need to tackle the deficit we inherited, this government is putting £4.5bn towards an affordable homes programme which is set to exceed our original expectations and deliver up to 170,000 new homes over the next four years.”

Phrases from Mr Shapps such as: “I Want to see”, “Pull out all the stops”, “The help they need”, “We need to get Britain building”, “Announced plans”, “Set to exceed” all indicate well-meant sentiments  – a “politician’s intent”.  Even the “170,000 homes over the next four years” is preceded by the phrase “set to exceed” and not “WILL exceed”.

Incidentally, the ONLY thing that Mr Shapps promises to exceed are his own expectations –  which have not yet been delivered anyway.

Yes, there is a shortage of housing but  the ROOT CAUSE of this dire situation is not being treated.

Once again, I shall put it in plain English: The reason why the housing market is in a moribund state is because the banks are NOT lending money to building companies and they are NOT lending money to first time buyers – who incidentally are becoming a near-extinct species.

Mr Shapps may well have held “summits with lenders” but he has not yet given us any indication of any positive outcomes. Meetings do NOT solve issues – only outcomes. So, Mr Shapps, what have the banks promised on this occasion? Amounts? Terms ? LTV? Underwriting Criteria? Perhaps The Big Society Banks can help??!

So far, we have The Big Society, Enterprize Zones and now the The First Buy Scheme.

The first is still a mystery, the second contributes little more than mass relocations of existing businesses and First Buy-type shared equity schemes  do little more that frighten first-time buyers by the morass of  bureaucracy into which they are suddenly plunged.

Once again, the REAL solution is in the hands of the BANKERS.

p.s. I am  surprised by the fact that the Royal Institution of Chartered Surveyors is still allowing itself to be pushed about by the banks. They used to be a very powerful organisation which played its part in controlling house prices.  The boom times prior to the 2008 crash turned the RICS into followers. They USED to be leaders. CLICK HERE

Time for a mortgage change.

There was reference on the TV News yesterday to homeowners being “hit” by negative equity. What the hell does that mean? You cannot be “hit” by negative equity.

The value of a house is not real money and borrowing more money on a mortgage is  exactly like selling shares. When you borrow more money on your house, you are selling a share in your house to a money lender (or Bank, as they prefer to be called).

Negative equity should not be houseowner’s problem  – it should be the moneylender’s problem. It would mean for instance, that if a moneylender is owed £100,000 and the property that he is lending money against has dropped in value to say, £90,000 – it should be him and not the borrower who is in trouble. Sure enough, he would not lend you any more money but that is not necessarily a bad thing.

One of the reasons that moneylenders will not lend you more than say 90% of the value of the property is because they need to see some “slack” just in case the value of the property falls and there has to be a forced sale.

I am now going to suggest something so radical that it will probably result in my arrest.

Banks, Building Societies and the various Financial bottom feeders who are now writing to us all offering more loans should share  risk with the borrowers. I will explain it very simply.

If a Bank lends 90% of the value of a property – it should remain at 90%.  That would have the dual effect of discouraging them from forcing a sale because they would incur a loss in a falling market but conversely, in a rising market they would be making a  profit.

For instance, you borrow £90,000 on a £100,000 property . In other words 90%. Assume that the value of your house then falls to £50,000. Nowadays, you still owe the Bank £90,000. Under the new system, the Bank’s share of your house would only be worth £45000, so it is in both yours and the Bank’s interest to sit tight and wait for the house market to turn. 

For a rising house market, we could add a clause into the mortgage deed to take care of any profit split between you and the Bank in the event of you selling the property and making a profit.

For example, you buy a house for £100,000 and then sell it a few years later for £150,000. The Bank lent you 90% and they still own 90% which is £135000. You are now thinking that this is not fair because they have made a bigger profit that you have.

How about adding a clause to the Mortgage Deed  which pre-agrees a profit split between you and the Bank. The interest rate that they charge is adjusted accordingly.

Because of very sophisticated accounting systems, there are far too many complicated mortgage products on the market: Fixed, variable, LIBOR-linked, discounted, offset, interest-only etc. etc. The same sophisticated systems could easily administer this new type of mortgage.

It is time to simplify and take some of the pressure away from the borrower.