Negative Equity and the gazunderer

Tuesday, 10th June 2008 14:20 - by Resident IFA

On May 29th, Nationwide released House price figures telling a tale of woe and falling prices – by 2.5% in May itself and by 4.4% year-on-year. This, in turn, leads to the spectre of ‘negative equity’. For those owning homes in the 1990’s, this may be the second time around, although it would be nice to think the intervening period has seen those homeowners have dramatically-reduced or non-existent mortgage debt. Put simply, negative equity happens when the value of a property falls below that amount of debt (mortgage and perhaps a ‘second charge’) secured on it. I have put on record in this Blog that I rejoice at the withdrawal of the 100% mortgage (however temporary) from the marketplace, but they were still available until only recently. The Council of Mortgage Lenders (CML) has released statistics reporting that 23,200 houses were purchased with no deposit in the year ending 31st March 2008. A problem arises when the homeowner tries to sell in a period of negative equity, most of the above 23,200 people likely already to be in this situation. Of course, if you don’t want to move on in the near-future and did your sums right on day one, making sure that you had a buffer of affordability in regard to your mortgage repayments and other bills, everything should work out just fine. My concern is that, when lenders were offering loans at 4.5 times income, and at least one I know of also ignored credit card debts when calculating their lending figure, the trouble is a lot more likely to start and be exacerbated in comparison to the situation homeowners faced in the 1990’s. This brings the speculator back into play, seeing the rise of the ‘gazunderer’. The gazunderer works on the opposite principle to the ‘gazumper’. The gazumper tends to jump in with a higher last minute property bid (often after a strong purchase agreement has been made i.e. property mortgage valuation and Solicitor instructed) in a rising market whereas a gazunderer is perhaps more nervy, lowering their bid just before the deal is due to complete in a cooling/falling market. Gazundering is not illegal in England and Wales. With mortgages taking longer to arrange and prices rapidly falling, it facilitates the occurrence of gazundering, figures estimating that one in ten sales are falling foul of this practice. A realistically-priced property from a homeowner ready to help things happen quickly and the transaction complete in good time may well ward off an unwanted gazundering experience. So, the balance of power seems to have swung from seller to buyer. From the seller’s point of view, they have to ask if they could get more money by refusing the gazunderer’s revised offer and placing the property back on the market, and the gazunderer has to check their ethical and moral compass. Could you gazunder? In the current climate, is it a case of leaving loyalty and morals ‘at the door’? Until next time...