What does negative equity mean?
Nov 13
There has been much talk about the nightmare of negative equity returning to haunt the UK property market in the press over the last few months in the press. What does this all mean and what is the impact it is likely to have on entrepreneurs looking to raise money?
There was an interesting statistic published last week. 39% of start ups require just £10,000 or less to take them through to profitability. I appreciate that business angel blog is aimed at businesses looking to raise slightly more than this amount but it is an interesting statistic.
An overwhelming number of businesses get funded from family and friends. The ability of most people to help start ups is linked to the value of their property and hence negative equity will have a strong and negative effect on the number of start ups that are able to access this vital line of funding.
Most people when buying a property will borrow money to make that purchase. Let’s say someone buys a property for £150,000 (more or less the average price of a home in England). They borrow 85% of the value and make a 15% deposit. I bought my first place with a 95% mortgage! This means that the equity they have in the property is £22,500. If the price rises by 10% to £165,000, and the debt remains the same so the increase feeds straight through into the equity element. The equity is now worth £37,500 – this is an increase of almost 90% (this is known as the leverage effect).
As the homeowner feels wealthier – they may be inclined to re-mortgage and use that extra wealth to fund a start up. (You should never as a rule use borrowed money to invest in a start up – but people do).
All very well so far. But what if the property price instead of going up 10%, falls in value by 20% - as it has in the last year in England? Suddenly your property is only worth £120,000. Your debt is £127,500 and hence you have £7,500 of negative equity. This leads to financial insecurity and hence an inability to help friends and family who need some money to start a business.
The irony is that when in a recession, more people lose their jobs and hence would like to give entrepreneurship a go – but find the lack of funds available a real barrier to start
Hi and welcome to my blog. 
Nov 13 at 21:34
Permjot,
Have you read Fools Gold by Scott Shane? It’s primarily about business angels in the USA, but really has some interesting stats about business angel investing, including the fact that the median investment is $10,000! Far lower than I’d have expected.
In light of your comment about £10,000 being low do you think the UK BA scene is very different the that of the USA?