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Nothing negative in long-term investment

16th June 2009 | back to article listings BACK    print this article PRINT

When house prices rise, the plaintive cry is usually that of the first-time buyer, who sees affordability disappearing over the horizon. Such a phenomenon has been a consistent feature of recent years as economic growth and a housing boom saw prices rising year after year.

However, in times of downturn and recession it is so often those who already own homes who worry. For them, the spectre of negative equity looms large, as falling prices reduce the value of their homes below that of the mortgages they are paying on them.

The term was on many people's lips in the recession of the early 1990s, when prices plunged, something that was, however, a distant memory before 2008 as a consistent increase in home values meant that those who had stayed in such homes found them not only regaining the lost worth but adding substantially to it.

Recently, however, that has been changing, as a new property correction (or slump, depending on one's point of view) has taken place as the economy has slowed, bringing the issue back onto the agenda.

Moreover, despite the recent house price surveys by Nationwide and Halifax indicating a rise in May, the likelihood is that the next few months will see a further downward movement, according to affordable housing pressure group PricedOut.org.uk.

Spokesperson Katy John said: "The rises in last month's house prices are likely to be a temporary blip," advising first-time buyers to save now and "expect house prices to fall further over the next year".

But even if the recent rises really are just a "blip" and prices continue to fall, this should not concern most property owners, be they owner-occupiers or investors, according to property industry expert Malcolm Harrison.

He stated: "Negative equity is only a problem if you can't fund your mortgage. Most people are still in work and provided you don't have to sell, negative equity is not a problem."

The key fact, he noted, is that buying property should never be a short-term undertaking and for those who look beyond the immediate future, it should be clear the problem is no great one.

"If your income is ok, negative equity is not the terrible problem that everybody makes out. Housing must be a long-term investment anyway. You buy a house to live in and even if it is buy-to-let, you shouldn't be thinking of doing it for less than five years. In five years' time I should think we would be well out of it [recession]," Mr Harrison concluded.

So just as homes that lost value in the early 1990s gained it again over the years of house price inflation that followed, so too should those slipping into negative equity now. For homeowners and property investors alike, lost ground should be more than clawed back over the next few years.

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