Regional gap in negative equity widens

The value of mortgages in negative equity soared by as much as £17bn in less than a year owing to growing economic problems and stalling housing markets in regions outside the south, according to Standard & Poor’s, the rating agency.

There has also been an increase in mortgage arrears for those in the firing line for austerity cuts in struggling towns in the north, according to S&P, which will this week warn that the government’s planned public spending cuts could disproportionately affect these regions. As a consequence, the rating agency said the regional divergence in mortgage risk could continue.

Mark Boyce, credit analyst at S&P, said: “We believe that the UK coalition government’s budgetary retrenchment could exacerbate this north-south divide. Due to the north’s greater dependence on government employment, we anticipate that unemployment in those regions – and consequently arrears – could escalate.

“Furthermore, although private sector job creation has offset public sector consolidation over the past year, about three-quarters of the new headcount has been in southern regions.”

According to its research, mortgages in negative equity – where the outstanding loan balance exceeds the value of the securing property – rose to 5 per cent in the first quarter of 2011, up from 3.6 per cent nine months earlier. S&P blamed the increase on falling house prices nationally, but added that northern regions accounted for two-thirds of the increase.

As of March, 8.5 per cent of loans to northern borrowers were in negative equity in its loan sample, compared with only about 2.5 per cent in the south. This has risen from 6 per cent and 1.5 per cent, respectively, since the second quarter of 2010.

S&P based its data on the performance of a sample of £150bn of securitised mortgages. The balance of loans in negative equity rose to about £7.5bn in the first quarter of 2011, from £5.4bn in the second quarter of 2010 when the group last conducted the research. By extrapolating this on the £1,200bn of outstanding mortgage balances, it implies a rise of balances in negative equity to about £60bn, from £43bn nine months ago.

S&P said that arrears among UK mortgage borrowers also continued to split between the north and south of the country. Its research found that the proportion of northern borrowers behind on their mortgage payments rose slightly to 3.9 per cent, from 3.8 per cent, in the nine months to March 2011. This means that they are about one-third more likely to be in arrears than borrowers in the south, where mortgage delinquencies fell over this period.

Mr Boyce said: “We believe this is partly due to the significantly more robust employment trends evident in the south of the UK since the start of the recent downturn in 2007, compared with the trends in the north.

“What’s more, the gap in arrears appears to be widening. When we conducted our initial study based on data from the second quarter of 2010, the difference in arrears between the north and south was only 25 per cent.”