Sunday, 25 May 2008

Alice's negative equity-o-meter

So far, the UK housing crash has not generated large amounts of negative equity. With prices down about 5 percent from the peak, only about 2.8 percent of mortgages have loan-to-value ratios higher than 95 percent.

Of course, it is early days in this housing crash, and as prices continue to decline, we can expect the negative equity-o-meter to start to increase.

By the way, this chart, perhaps more than any other indicator, explains why the banks dived into the housing market with such reckless abandon. As house prices went up, loan to value ratios fell. It made mortgage lending look so safe. After all, there was such a hugh cushion of home equity out there to protect the banks.

However, house equity is not the same as household capacity to repay loans. If large numbers of homeowners begin to default, repossessions will to rise, prices will fall, and home equity will disappear like water on a hot stove.

Then we will begin to see some seriously large negative equity numbers. Give it a year or so, and the equity-o-meter will be the most important economic number in the UK.

(Data source: Bank of England, Financial Stability Report)


Mark Wadsworth said...

That is a nice straight line, which'll make the arithmetic much easier, what we also need to know is how many people have mortgages.

tom said...

I have a sneaking suspicion that the BoE's data doesn't include secured loans, so things are actually quite a lot worse than that chart suggests.

Alice Cook said...


Good point. I believe you are right. This data does not include secured lending, i.e. housing equity withdrawal.

On the coming days, I might post a chart on that to clarify you point a little.

Thanks for the comment.


aSteve said...

Woah! HEW/MEW is definitely a part of a mortgage. In addition to this, there are "Homeowner loans" - which are not part of mortgages but increase the debts of those with mortgages - Picture Loans et-al.

Your graph gives me another idea... I do think that negative equity is important... very important. What I'm wondering is this: If the same proportion of mortgages are in negative equity (i.e. with substantial risk of default according to models that correlate such metrics) as in the early 90s, how far down would prices have to fall?

london estate agent said...

Just what I thought - a huge equity cushion. Prices could easily fall 20 percent and very few loans would be under water.

Oldftb said...

Welcome London Estate Agent.

And how many of your EA colleagues have closed down so far due to the "flat" or "soft" housing market?

sweep the streets. said...

London estate agent. I wonder how much comfort you will get from your cushion when prices are down 30%?

How is business right now?

Josh said...

I can't actually believe that EA's are bothering to visit this site.

Anonymous said...

That line is going to drift to the left faster than most people expect


passer-by said...

This is a graph of the fraction
of mortgages with _at least_ these

Wouldn't a graph of the fraction
with _exactly_ each LTV have been
easier to read? (Well, by exactly
I mean to within one percent).

Alice Cook said...

passer by

The data was in 5 percent intervals. Actually, I tried a couple of ways of presenting it. In the end, I thought the one I posted was the best. It shows how many mortgages fall into NE as prices fall.

Thanks for the comment.


Anonymous said...


Why don't you give the graph a catchy name (I'm afraid the best I can think of is the Alice Home Equity Aggregate Destruction Index, of the AHEAD-Index for short.

Put a sticky link to it and track it over time, every time the data series is available. Perhaps you could roll it backwards through time to get a trend. You might get lucky and find people tracking it.


Lurker said...

This is a great way of following the crash, Alice. Please keep updating it.

London Estate Agent (!) - do you know what percentage of mortgage-holders ended up in -ve equity last time?

Anonymous said...

I dont understand this graph.

I have an LTV of around 30% at todays prices.

What percentage of mortgages have this LTV? Shouldnt this be a total rather than percentage? All of those percentages dont add up to be 100!

Sorry if I'm being thick.


Lurker said...

I think it reads as roughly 68% of mortgages have a LTV of 30%.

aSteve said...

Erm... the graph says that about 32% of mortgages have a LTV of 30% or better - while 68% have an LTV of 30% or worse.

My biggest complaint is that the V part of LTV is a fantasy figure supported by other mortgages. There is no external measure for asset value.

Another issue I have with this is that LTV suggests that the borrower is irrelevant. This is a nonsense... if someone is 30 with an income of £50K and a mortgage of £150K on a £150K purchase, the chances are he will pay it off without difficulty. Conversely, a 60-year-old with a residential mortgage of £300K on a property 'valued' at £1m, while also earning £50K, has 30% LTV but is incredibly unlikely to be able to either sell his assets or earn sufficient to repay his debts.

Without taking into account both age of the mortgagee and their income... LTV is an utterly ludicrous measure of risk. Even so, this obvious observation doesn't seem to have worried the investment banks.

Anonymous said...

"My biggest complaint is that the V part of LTV is a fantasy figure supported by other mortgages. There is no external measure for asset value."

Agreed the first point. Disagree the second. All investments can be valued as the NPV of future cash flows. An art not a science, but still possible to do meaningfully.

But yes, LTV is rather silly in some respects. It is very good for predicting default rates though. Once people lose equity they are far more likely to default.