The first set of people that lose out are homeowners moving down market. The gap between selling a larger home and buying a smaller one narrows when one moves down market. Given the massive growth in house prices over the many decades those homeowners have been in the property market, it’s tough to see this as a calamity, yet it’s certainly a loss.
The second set of people that lose out are beneficiaries of the home being sold when a parent/grandparent passes away.
Let us all be honest; I believe there will be little sympathy in the broader community for those first two sets of people for their loss of money.
However, the most exposed (and many people will sympathise with these) are those first-time buyers who bought their first home with a small deposit. If you had just bought your first home for £200,000 with a 5% deposit (so you had a £190,000 mortgage) but Swindon house prices dropped by 10%, you now own a home worth £180,000 (less than the mortgage). Now you are in ‘negative equity’ (as your mortgage is £10,000 more than what the house is worth, i.e. £190k less £180k), which causes you two main problems.
Firstly, when your fixed rate deal ends, most of the time, it is wise to re-mortgage to another rate. However, when you have negative equity, the range of mortgage deals open to you will be minimal, so you will probably have to pay your bank/building society’s quite pricey ‘standard variable rate’.
Secondly, suppose you want to sell your Swindon home. In that case, the price you achieve will not pay off the mortgage, which means you will have to find the difference elsewhere (i.e. a gift/borrowing from your family or selling an asset like a car)—in a nutshell, making a move very difficult.
How many people will be drawn into negative equity if house prices drop 10%?