Aberdeen has seen a 42% increase in new mortgages categorised as ‘risky’ by the Bank of England since 2010 – meaning the recent oil price crash could trigger an increase in home repossessions.
The default rate of mortgages in Aberdeen could rise very quickly if redundancies in the oil and gas sector increase, leading to rising arrears and repossessions.
In the years of the oil boom the average house price in Aberdeen rose sharply catching up with the average price of properties in Edinburgh, increasing by 9.8% in the last year (to end Q3*). Future house price growth in Aberdeen was assumed to be all but guaranteed encouraging purchasers to take on bigger mortgages at higher percentages of their income.
Since the oil price crash of recent months there are concerns that confidence is draining from the market and prices may go into decline.
Redundancies and project cancellations have already been announced by a number of major oil companies. BP recently announced 200 job cuts and the loss of 100 contractors. Pay rates for contractors at oil and gas service companies have also been cut. Even oil and gas majors are under pressure from shareholders to cut their workforce.
The number of new risky mortgages across Scotland increased by 2% since 2010 compared to a 42% increase for Aberdeen. Risky mortgages in Edinburgh were up 9% in the same period and up 10% in Glasgow.
The Bank of England categorises as risky those mortgages where the total amount lent is 4.5 times or more the salary of the borrower or borrowers. 529 new mortgages on homes in Aberdeen and Aberdeenshire exceeded this in 2014 compared to 373 in 2010.
Many more homeowners will be paying mortgages at stretched multiples, although just within the Bank of England’s 4.5 times salary ratio.
The Bank of England introduced rules last year to limit the number of these risky loans lenders can offer. A maximum of 15% of a bank’s mortgage portfolio can exceed the 4.5 times salary ratio.
Jeremy Willmont, Head of Restructuring and Insolvency says: “The oil price crash could drag down the housing market in Aberdeen. If mortgage failures lead to a drop in house prices in Aberdeen a considerable number of people could suddenly find themselves in negative equity.
“Disposable incomes have risen more in Aberdeen over the past 5 years than anywhere else in the UK, thanks to a combination of low interest rates and high oil prices. This may not be the case for much longer.
“The oil price fall has already had a negative impact on the employment prospects for some of those working in the oil industry. Second line consequences for the housing market and service industries in areas particularly affected may now start to emerge.
“It is possible that the price of oil will remain at this level for the medium term. If the price is this low when interest rates eventually start to rise the outlook for the Aberdeen property market could get considerably worse.
“This will be unwelcome news for mortgage lenders too. The fall in the oil price came as a surprise to most people, but banks will not want to be linked to risky property loans, whatever the underlying cause.”
The increase in ‘risky’ new mortgages since 2010** in Aberdeen dwarfs that of Edinburgh and Glasgow
*Source: Registers of Scotland
**‘Risky’ new mortgages taken out in Q4 2009-Q3 2010 compared with Q4 2013-Q3 2014[/caption]
Restructuring & Insolvency team