FCA Warns of “Unsustainable Burdens of Debt” for 630,000 Families

April 18, 2013

Luke-Notley small (Custom)The Financial Conduct Authority has warned that as many as 630,000 UK families could be in negative equity.

The FCA’s first Risk Outlook report, published this month, estimated that between 160,000 and 630,000 people have mortgages that exceed the value of their home, based on information from property analysts and the mortgage industry.

The 67-page report suggested that the problem may not be as bad as it was in the early 1990s, when negative equity affected around 1.1 million borrowers. However, the report states it has become more of a regional issue. The report says: “According to the Bank of England, negative equity affected around 10.5 percent of mortgaged households. At a national level, this is significantly more than today’s estimates imply. However at a regional level, the picture is different. In the 1990s, negative equity was concentrated primarily in the southern regions of the UK. This time around, the recession has hit the northern regions hardest and, as a result, negative equity is more concentrated in the North.”

The report warned that if house prices fall further, this will mean even more families being faced with negative equity. According to the risk report, “For those holding a mortgage, price falls can leave homeowners with little or negative equity in their homes, which can leave borrowers with unsustainable burdens of debt, unable to move and restricted in their options to remortgage onto better rates.”

Whilst house prices have stabalised recently, the report warned that consumers should not be too optimistic, and should figure in the effects of inflation. “Many ignore long-term performance trends, underlying levels of risk and the impact of inflation on their asset holdings, focusing instead on recent price movements.

“Financial decisions that do not account for these factors can create over-optimism around expected future returns and spending power.

“This over-optimism can lead to detriment if consumers are tied to inappropriate decisions arising from these misperceptions.”

Campbell Robb, chief executive of the charity Shelter, said: “The impacts of negative equity can be devastating, in particular for people who have to sell their homes, leaving them chased for crippling levels of debt and often without a permanent roof over their heads.

“Given the performance of the property market immediately before the recession started, many people entered into homeownership thinking that when it came to house prices, the only way was up,” he said.

“The past few years have left many people in very difficult circumstances they would never have foreseen.”

Martin Wheatley, chief executive designate of the FCA, which took over from the Financial Services Authority this week, said it was “a very uncomfortable position” for homeowners in negative equity. He added, “If interest rates rise, it may become much more of a problem.”