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Sellers become victims of equity mobility
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Average property asking prices have risen again according to the latest Rightmove house price report. Does this signal an improvement in the fortunes of the property market? We take a look
This month has seen the largest May increase in average asking prices since 2003, reports property website Rightmove. Prices have increased to £227,441, a rise of 2.4% compared to 1.8% the previous month. Following months of falling house prices this appears to be a positive sign for the property market. However, further investigation reveals a different story altogether.
Rather than driving the demand for property, sellers appear to be driving the increase in house prices through a mixture of ambition and optimism, but more importantly through necessity. With lenders enforcing stricter loan-to-value ratios, many sellers fear that if they don’t increase the price of their property their equity could be eroded to danger levels and they won’t be able to find an affordable mortgage deal to fund their new purchase.
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Equity immobility
Many prospective sellers are finding themselves effectively immobile due to insufficient equity to fund their move. Rightmove reports just 61,000 new sellers this month compared to 135,000 last May, indicating the reluctance (or inability) of sellers to put properties up for sale.
“Many people who might have wanted to take advantage of the spring selling season to trade up will be victims of equity immobility. The choice of when and how to move is now out of their hands,” says Miles Shipside, commercial director at Rightmove.
“Equity-poor home owners are either not coming to market, or are having to price high.”
Stricter borrowing requirements, including 25%-plus deposits, are making the best mortgage deals out of reach for many. And it’s not just first-time buyers who are being affected by this credit squeeze. The following three groups of existing property owners are also feeling the pinch, making it impossible for them to sell in order to trade up or down. They include:
Equity releasers – encouraged by easy credit and rising house prices they funded their lifestyles by regular remortgaging and equity release. As prices have fallen the equity releasers have found themselves in a position where they no longer have enough equity left in their property to fund a move.
Recent buyers – carried away on the wave of house price rises and easy borrowing, with little or no deposit and very little initial equity, this group could now have found themselves in or close to negative equity. While they may want to move, without a decent size deposit it won’t be an option for recent buyers.
Equity losers – with up to 25% equity, falling house prices have eroded their once substantial equity cushion. some of the best mortgage deals could well be out of reach, or stretching finances to the max, for equity losers.
Equity immobility, caused by reckless lending during the last housing boom, is just one of the factors restricting growth in the property market. Shipside believes that this could be resolved by “more affordable mortgage products at higher loan-to-value ratios or substantial increases in property values”; however, it is impossible to put a timescale on this.
In the meantime, sellers who are attempting to force the market by asking for higher prices should be wary. “While buyer sentiment is improving… the number who can proceed has been savaged by the mortgage famine,” says Shipside. “Pricing below your competition, if you can, is vital in order to achieve a sale.”
by Julie Richardson, 15 April 2009
