RTTNews - Record decline in British house prices have pushed more households into negative equity, the quarterly bulletin from the Bank of England revealed Friday. Negative equity occurs when the market value of a house is below the outstanding mortgage secured on it.
The central bank found that between 7%-11% of U.K. owner-occupier mortgagors were in negative equity. However, the vast majority of households had substantial equity on their homes and for the majority of households who were in negative equity, the size of that negative equity was relatively small.
According to the Financial Services Authority, a 20% fall in house prices would have raised the number of households in negative equity to 1.1 million.
The central bank added that negative equity can lead to a further contraction in the availability of credit to both households and firms and can also reduce household mobility. In case of default, negative equity can raise the loss that lenders would incur.
Looking forward, the BoE assessed that the monetary policy and financial stability implications of negative equity depend largely on the outlook for house prices and for factors that affect households' ability to service debt, including interest rates and unemployment.
In its latest bulletin, the BoE said injecting more money into the economy would stimulate spending, helping it to bring inflation to the 2% target in the medium term. The BoE noted that if banks use the additional reserves to raise lending, the impact could be stronger.
It is too soon to say how powerful the stimulus will ultimately be. There is considerable uncertainty about the strength and timing of the effects, the central bank said.
The cost of debt capital for firms declined despite the pick up in gilt yields. Though issuance remained skewed towards higher-rated borrowers, contacts reported increased interest on the part of lower-rated companies to issue into the market, the BoE said.
In an interview, the Chancellor of the Exchequer Alistair Darling told the Financial Times that he is cautious over the prospects of recovery in the U.K. Due to the failure of other European nations in cleaning up their banks as well as rising oil prices could impact the British recovery, he said.
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