A study of regional differences in mortgage arrears and borrowers’ equity positions indicates that the recent recession has hit borrowers in the North of the UK harder than those in the South.
The report by Standard & Poor’s Ratings Services, says this divide could widen.
“Given the North’s public sector jobs bias, looming cuts in government spending could widen this regional gap,” said credit analyst Mark Boyce.
“Using data from about 1.5 million loans backing UK prime residential mortgage-backed securities (RMBS) that we rate, we found that the level of arrears among mortgage borrowers in the North was almost 25 per cent higher than in the South.
“Our study also found that the default rate over the 12 months to mid-2010 was more than 50 per cent higher in the North than in the South.
“Additionally, an estimated 6 per cent of mortgages in the North and more than one in 10 in the North-West in particular were in negative equity at the end of June, compared with only 1.5 per cent in the South.”
One reason for this North-South divide appears to be the differing trend in unemployment across regions and sectors. Recently announced government spending cuts will result in almost half a million public sector job losses by 2015 and this will have a knock-on effect into the private sector. The public sector accounts for a larger share of jobs in the North than in the South.
Northern employment may also have fared worse given the region’s focus on the sectors hit hardest in the downturn, in particular, construction and manufacturing. At the height of the real estate boom in mid-2007, almost two-thirds of the UK’s construction and manufacturing roles were located in the North. Employment in these industries fell by more than 10 per cent from the end of 2006 to the end of 2009.
The agency’s analysis also indicates that a disproportionate number of job losses were in the North. Between the end of 2006 and the end of 2009, employment in the North fell by more than twice the drop in the South. The Northern unemployment rate now stands at 20 per cent higher than in the South, which S&P says helps to explain the regional differences in arrears and default rates.
S&P says there is generally a strong link between unemployment and mortgage arrears and is a more significant driver than interest rate rises. As the national unemployment rate increased by more than 40 per cent between the end of 2006 and mid-2010, total arrears in the UK prime RMBS transactions S&P rates rose by 90 per cent.