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Equity issues slash number of houses for sale

This is the largest May rise Rightmove has measured since 2003, when property was seeing annual increases in excess of 15%.

However, Rightmove said sellers may be pricing at this level because they fear that their equity could be eroded to danger levels where they would be unable to find an affordable mortgage deal on their new purchase due to lenders’ stricter loan-to-value ratios.

The average property asking price has risen to £227,441 from £222,077.

Miles Shipside, commercial director at Rightmove said: "The long-term worry is that the supply side of the housing market is now compromised for several years to come.

"Developers have shed much of their workforce so could struggle to increase capacity, and we are now seeing the lowest number of new sellers of second-hand homes for the month of May since 2003.

"Many people who might have wanted to take advantage of the spring selling season to trade up will be victims of equity immobility.

"The choice of when and how to move is now out of their hands. While some of the impetus behind the increase of over
£5000 in average asking prices will be due to ambition or optimism, it will also be out of necessity as new sellers attempt to scrape together enough equity to move."

While new stock is in short supply, the existing inventory of unsold stock remains stubbornly high, dropping from 72% to 71% per estate agency branch.

This points to a high level of effectively unsalable stock, and many of these sellers will be stuck in the equity immobility trap and therefore unable to reduce prices further without compromising their ability to move.

Lenders are short of funds and more sensitive to risk, and therefore denying movers access to their better mortgage deals unless there is a substantial deposit, often 25% plus.

As well as first-time buyers, there are three groups of existing property owners who are also affected by this squeeze on credit and thus are unable to sell to trade up or down. These are:

* "Equity releasers" who habitually withdrew cash during the 2001-2008 re-mortgage spree. Encouraged by cheap and easy credit and rising property values they funded their lifestyles by regular re-mortgaging and equity release. Figures from the Council of Mortgage Lenders show that in the eight years from 2001 to 2008, the total value of remortgages increased by 460%
compared with the period from 1993 to 2000. With falling prices, many will now have been left without enough equity to fund a move.

* "Recent buyers" with no or low deposit, and now in or close to negative equity. Some would now be prospective trader uppers having outgrown their property, but with falling prices and little initial equity, they face a more difficult task to raise a higher deposit than they did when they last bought.

* "Equity losers" still with up to 25% equity but due to falling prices have lost their substantial equity cushion and are now borderline to get the best mortgage deals should they move. Sums that would have stacked up two years ago are now not so compelling, especially when you take into account the costs of buying and selling.

Shipside said: "Equity-poor home owners are either not coming to market, or are having to price too high. The scale of the problem is potentially far worse now than in the 1990s downturn, as re-mortgaging activity was then in its infancy having been strictly controlled until the deregulation of mortgage markets in 1986.

"It took off when in 2001 when lenders seemed to lose all sense of prudence, and there followed eight years of equity abuse that eroded the cushion that a decade of rising house prices had built up.

"This is one of the factors restricting the volumes in the housing market, and will only be resolved by affordable mortgage products at higher loan-to-value ratios or substantial increases in property values. It is impossible to put a timescale on this."

Prospective buyer interest is rising with inquiries 109% ahead of last year.

But Shipside said the number able to proceed was "savaged" by the mortgage famine.

"With deals being done at prices 25% below the peak of the 2007 boom, it’s not surprising it’s taking some
sellers a long time and some hefty price slashes to adjust to the new 2009 price floor," he said.

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