More than one million householders – about 10 per cent of all mortgage-holders – could soon find themselves with homes worth less than the debt outstanding on them, according to the Government's former adviser on the housing market.
The return of negative equity, last seen in the house price crash of the early 1990s, is predicted by David Miles, Managing Director in Economic Research at investment bank Morgan Stanley. Professor Miles' research puts a "bear case" of a 25 per cent decline in values over this year and next, with a "central" projection of a 10 per cent fall this year and 5 per cent next year: "House prices look vulnerable, and will likely fall further." That would push 1.2 million householders into negative equity totalling £164bn.
Anyone who bought a property this year is probably already in negative equity, while one in eight of the mortgage loans that were outstanding at the end of 2007 would be worth more than the property they are secured upon.
However, even such a correction would only take house prices back to where they were in 2006 and Professor Miles does not expect the UK to play out as badly as the early 1990s or the US now. Overall, the UK has about £1trn (£1,000bn) of mortgage debt and £2.5 trn of housing equity. Last night, the Chief Economist at the Bank of England, Charles Bean, pointed out that "only 5 per cent of mortgagers have less than 20 per cent equity in their home. So house prices would have to fall a long way before a lack of collateral became a constraint for most homeowners." And average prices have trebled since 1997.
In 2004, Professor Miles reported on reforms to the mortgage market. His latest work echoes gloomy predictions from other City analysts. The Halifax reported a 2.5 per cent drop in values last month. The credit crisis has choked off the supply of finance for mortgages and prevented the Bank of England's cuts in interest rates feeding through.
Ministers are concerned about the impact of a housing crash on economic stability and on the level of repossessions. A "summit" chaired by the Chancellor of the Exchequer with the Council of Mortgage Lenders will be held on Tuesday focussing on the 1.6 million homeowners coming off fixed rate deals during the next year. The Treasury and the Bank of England are also working out the details of a bail-out plan for the banks. Anything from £40bn to £150bn could be lent by taxpayers via the Bank of England.
The impact of a housing crash on the economy is difficult to predict, Morgan Stanley say, but they put the probability of a UK recession at up to 30 per cent.
In his Budget last month, the Chancellor reduced his growth prediction for the UK in 2008 from 1.75 to 2.25 per cent, above many independent forecasts.
And Mr Darling's forecast that the economy would bounce back to growth of 2.25 per cent to 2.75 per cent in 2009 looks out of line. The odds are shortening on the Government watching the economy slide into recession under a wave of negative equity in the run-up to the next election.
Top award for Independent writer
David Prosser, The Independent's deputy business editor, has been named Personal Financial Journalist of the Year at the Harold Wincott Press Awards. Mary Francis, chairman of the judging panel, said the prize reflected The Independent's hugely successful campaign against unfair bank charges. Ms Francis pointed out that articles highlighting unfair and potentially illegal unauthorised borrowing charges had prompted a Competition Commission inquiry and resulted in a court case brought by consumer groups against leading banks. Ms Francis said Prosser's articles on bank charges had been of "consistently high quality and they made a difference".