Hit to house prices could see homeowners go under

LBS economist says homeowners’ debt could exceed their asset value

A possible dent of 25% in UK property prices could leave homeowners saddled with debt that is more than the value of their asset for several quarters to come, an LBS economist has warned as the UK property market reacts to uncertainty in the wake of a vote for Brexit.

Paolo Surico, Professor of Economics, London Business School, says: “In the UK about 40% of population has a mortgage and a large fraction of them are typically liquidity constrained despite owning sizeable illiquid wealth (such as housing) because a significant portion of their income is pre-committed to large expenditure categories such as mortgage repayments.

“A large drop in UK residential prices means a large proportion of those mortgagors may become at risk of going under, with debt that is more than the value of their asset. Furthermore, re-mortgaging may become significantly more expensive than in the past, stretching even further mortgagors' finance.”

As the Royal Institution of Chartered Surveyors (Rics) Residential Market Survey for June 2016 reports the third successive monthly drop in sales, Surico believes an interesting dynamic between sales and lettings may follow.

“As the demand for purchasing property declines, the behaviour of home-owners may shift from selling to renting. In this case, the rental market may take a hit too,” Surico says.

The decrease in property prices (and asset prices more generally) will affect everyone he says, not just homeowners.

“A depreciating pound will see consumer prices increase whereas falling asset prices and raising uncertainty is likely to deter household durable purchases and firms' investment. All these developments may reinforce each other in depressing aggregate demand and trigger a generalised fall in employment. In virtually all previous recessions, young and low-skilled workers have typically paid the highest toll in terms of unemployment despite being rarely homeowners.”

About Paolo Surico

Paolo Surico is a Professor of Economics at London Business School. 

He teaches on the following programmes: