Bad news for homebuilders and homeowners

15 July 2008

The UK’s economic problems aren’t limited to ‘just’ the credit crunch or ‘just’ the fall in house prices. Unfortunately, bad news often leads to more bad news: today, the credit crunch means many people can’t get a mortgage, which further depresses demand for – and prices of – houses, which means less money for homeowners, homebuilders and the whole economy.

Lower demand – a problem for homebuilders
So when homebuilder Taylor Wimpey announced it was closing around a dozen offices, it was a bad sign for the UK in general, not just the 900 workers who were losing their jobs.

According to the RICS (Royal Institute of Chartered Surveyors) UK Construction Market Survey, workloads in the construction sector are falling faster than they have at any time since the Autumn of 1995.

Lower prices – a problem for homeowners
Falling prices can force existing homeowners to delay selling their property, especially if they’ve fallen into negative equity* (owing more on their property than it’s actually worth).

They can also keep some homeowners from accessing some of the debt solutions that could help them get out of financial trouble. Debt solutions like:

• Secured debt consolidation loans
  Homeowners can reduce their monthly outgoings by paying off their high-interest debts with a secured debt consolidation loan (which should have a much lower interest rate) that’s secured against the equity they own in their property.
• Debt consolidation mortgages
  With a debt consolidation mortgage, the homeowner basically replaces their ‘old’ mortgage with a new, larger one, turning some of their equity into cash that they use to pay off their unsecured debts.

Finally, many homeowners have grown used to drawing on their equity to free up funds for other reasons than debt consolidation – they could be buying a car, improving their home or going on holiday. For many, this is no longer an option: now that they can no longer rely on constant increases in the value of their house, their equity only increases as they pay off more of their mortgage.

A fall in house prices can be bad news for would-be homeowners as well as current homeowners: even if they can get a mortgage, it takes a lot of courage to buy property when prices are dropping.

Less disposable money – a problem for everyone
When homeowners are worried about dropping house prices and we start to see mass redundancies in the construction industry, the ‘average consumer’ is unwilling or unable (or both) to spend as much as they used to, and the whole country suffers. Not just the people who work in the shops, but the ones who make, deliver or service the goods; not just the taxi drivers who take people to the shops but the café owners who feed them when they’re shopping.

Coping with a lower disposable income is never easy, but with our ‘personal debt mountain’ of almost £1.5 trillion, huge numbers of UK citizens find that every penny of their income is taken up with essentials, from rent / mortgage to food bills and debt repayments.

For anyone in that situation, any drop in disposable income can be a serious problem, and it’s vital they talk to an expert debt adviser as soon as possible. The right debt advice can help them budget – and deal with their debt repayments – more effectively.

If that isn’t enough, a debt adviser should also be able to help them choose the debt solution that’s right for them: even if a homeowner can’t or won’t consolidate their debts by drawing on equity in their home, they may, for example, be able to reduce their monthly debt payments by entering a debt management plan.

*Equity is the portion of the property that the homeowner owns outright:
equity equals value of property minus value of mortgages / loans secured on it

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