Collapsing house prices are plunging 60,000 homeowners a month into negative equity, which means the country is on course for a worse crisis than the 1990s crash.
At current trends, 2m households will enter negative equity by 2010, outstripping the 1.8m affected at the bottom of the last housing slump.
New research from Standard & Poor’s, the ratings agency, coincides with evidence that banks are aggressively seizing homes whose owners have slipped just a few hundred pounds behind on their mortgage payments.
It is a further signal that the financial crisis is now infecting the real economy as hundreds of thousands of families face the prospect of being unable to move house because their home is worth less than the value of their mortgage.
Many more homeowners will now be afraid that the bank may suddenly repossess their property. Repossessions have soared to 19,000 in the first half of the year, up 40% on the previous six months. That figure is expected to rise to 26,000 in the second half of 2008.
Economists believe house prices will fall by up to 35% from their peak by 2010. This compares with a drop of only 20% in the early 1990s.
Last night opposition politicians blamed Labour for encouraging a “culture of indebtedness” that now threatens to cause an implosion in the housing market. Philip Hammond, the shadow Treasury chief secretary, said: “We are now paying the price for a decade of debt-fuelled boom, with hundreds of thousands of people unable to sell their property, after being encouraged by the government to overstretch themselves to get on the property ladder.”
Vince Cable, the Liberal Democrat finance spokesman, urged Gordon Brown to do more to prevent unnecessary repossessions. “It genuinely must be a lender’s last resort, which right now it certainly is not,” he said.
With official figures out this week expected to show Britain has fallen into recession, Brown is planning a 1930s-style programme of public works, spending billions on new schools, homes and transport projects. He has urged senior colleagues to increase expenditure on big capital projects – despite forecasts that tax revenues are about to collapse.
Brown’s ambitious plan is modelled on Franklin Roosevelt’s New Deal, which helped drag America out of the Great Depression. A Whitehall source said: “We cannot afford to risk the complete collapse of our construction industry. We have to make sure that the skills have not been lost when we finally pull out of the downturn.”
Standard & Poor’s has calculated that by the end of the month 335,000 homes will be worth less than their mortgages. The figure represents a rise of 260,000 in four months.
Capital Economics, the City consultancy, expects up to 2m properties will be in negative equity by 2010 – more than in the recession of the early 1990s.
Northern Rock, the bank nationalised this year, is said to be behind a wave of aggressive repossessions. In the nine months to the end of September, the state-owned lender made more than 2,000 seizures.
Esther Spick, from Surrey, is three months in arrears on her Northern Rock mortgage. The lender has launched repossession proceedings, even though she owes just £1,200. In one case reported to The Sunday Times by a housing charity, the bank is trying to seize a home where the owner is just £800 in arrears, even though he has about £40,000 of equity in the £180,000 property.
Chris Tapp, director of Credit Action, a debt charity, said: “What makes these negative equity statistics so worrying is that they come at a time when banks are behaving so unreasonably over repossessions.
“We are particularly dismayed with the inflexibility of Northern Rock. ”
Adam Sampson, chief executive of Shelter, the housing charity, said: “Northern Rock is behaving very aggressively on repossessions, but it is not the only lender acting like that.”
The Council of Mortgage Lenders said there were no industry guidelines for how deeply in arrears a lender had to be for a home loan provider to be entitled to launch repossession proceedings.
The government said last night it would bring forward laws forcing lenders to offer alternative payment schemes before they were allowed to take back possession of the property.
Northern Rock denied that it was overly aggressive. “Repossession proceedings are only launched as a last resort,” it said.
The details of the prime minister’s extra spending on public works is expected to be unveiled in the pre-budget report next month. Brown has already tasked his new “enforcer”, the Cabinet Office minister, Liam Byrne, with compiling a list of major construction projects at risk from the credit crunch that would benefit from extra government support.
Brown’s handling of the financial crisis has failed to improve Labour’s electoral prospects. Despite most voters saying he had performed well over the past few weeks, only 13% said they were now more likely to vote Labour, an ICM survey for the News of the World found.
October 19, 2008
Robert Watts and Jonathan Oliver
Source: The Sunday Times