The Economics and Estimation of Negative Equity
12 Pages Posted: 17 Jun 2009
Date Written: June 12, 2009
Negative equity occurs when the market value of a house is below the outstanding mortgage secured on it. As house prices fall, the number of households in negative equity tends to rise. Between the Autumn of 2007 and the Spring of 2009, nominal house prices fell by around 20% in the United Kingdom. There are no data which accurately measure the scale of negative equity. Three estimates presented in this article suggest that around 7%-11% of UK owner-occupier mortgagors were in negative equity in the Spring of 2009, although for most of those households, the total value of negative equity was relatively small. The effects of negative equity can be painful for those households concerned. Negative equity can also have implications for both monetary policy and financial stability, which are discussed in this article. These effects are likely to depend on developments elsewhere in the macroeconomy and financial system.
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