Monday, April 21, 2008

Is negative equity a big problem?

I don't thinks so. There may be a huge psychological problem because of the scars the the 1990's house price crash, but this time is very different and as long as people don't panic they should be OK.

Then we had high interest rates and a deep recession. I remember getting in to my car on black Wednesday (or is it good Wednesday?) and hearing the news announce 15% interest rates and feeling numb - I had a reasonably paid job, a relatively low mortgage (I never borrow more than 2.5x salary) and I was going to struggle so how would the unemployed cope.

This time it is different and without wanting to sound like a NuLab supporter interests rates are lower and unemployment is relatively low. All people have to do is hang on and the market will turn back up, no matter how low it goes.

Building societies may not like it but they won't throw someone out for being in negative equity. It will be a problem for those who need to move for, say, work reasons, maybe they will have to live away during the week, not nice but doable. For those who do lose their jabs life will be very tough, but we do have a welfare state. For those coming off fixed rate mortgages there will be the shock of new higher payments, but they should have been budgeting for the new payments.

The only reason why negative equity is a problem is the perception of wealth. We have got used to getting richer without doing anything other than check the latest price of our house every couple of months. Well that has come to an end for a while so we just need new a new mindset of accepting a house is a home for living in, not a free pension.

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