The latest quarterly bulletin by the Bank of England (BoE) emerged today estimating the figure of negative equity in the UK, which suggested between 7% - 11% of Britain’s homeowners are currently struggling under negative equity.

Bank of England (BoE) emerged its latest quarterly bulletin estimating that around 7,000,000 to 1.1 millions of Britain’s homeowners may have fallen into negative equity (similar to the level in mid-1990s). A negative equity occurred when the value of the property went below the outstanding value of the mortgage secured. The fall in house prices would affect the value of equity and is likely to result in negative equity when it falls excessively.

House prices, as reported by the bulletin, have dropped by 19% in a year and a half since 2007; between 7% - 11% of borrowers are struggling under negative equity, which have a huge impact on them and their standard of living and consuming styles. According to the latest quarterly bulletin from the BoE, the effects of negative equity include:

1. Reduction in household mobility

Individuals are discouraged and reluctant to move or relocate to another property under a negative equity situation. Some explained that homeowners in this condition do not wish to realise their loss on their properties; also, households would not be able to move unless they repay their existing mortgage and meet the downpayment requirements for the mortgage of the new house.

2. Decrease in housing supply

The reduction in household mobility has a macroeconomic effect on the economy, which leads to a drop in the supply capacity within the housing market.

3. Credit Constrain for households

Negative equity could significantly increase the credit constrain of the households. Individuals who are affected by the fall in house prices would be more likely to borrow more for finance expenditure; yet, most of them fail to do so as the price of credit is either too high or the lenders are not willing to provide them with the sum. Homeowners who are pushed into the negative equity then have to tackle with bigger savings and lower spending.

The report showed 7,000,000 to 1.1 million of mortgage borrowers are suffering from negative equity, of which 200,000 were buy-to-let investors who resulted owing more on mortgage than the value of their properties. As the economy has not recovered from the recession, the house prices would stay low (resulted from 19% drop since 2007); hence, for those people, no matter they are homeowners or buy-to-let investors, who have fallen into the state of negative equity, should certainly ask for advice and help to survive through this tough economic climate.

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