Negative equity 'will hit over one million homes'

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".

Finacial products from our partners
Property search
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    SThree: Trainee Recruitment Consultant - Swiss Banking and Finance

    £20000 - £25000 per annum + Uncapped commission: SThree: Can you speak German,...

    Ashdown Group: Marketing Executive - 6 month FTC - Central London

    £25000 - £30000 per annum + benefits: Ashdown Group: An exciting opportunity f...

    Ashdown Group: Junior Project Manager (website, web application) - Agile

    £215 per day: Ashdown Group: Junior Project Manager (website, web application ...

    Guru Careers: Software Engineer / Software Developer

    £40-50K: Guru Careers: We are seeking an experienced Software Engineer / Softw...

    Day In a Page

    Fishing for votes with Nigel Farage: The Ukip leader shows how he can work an audience as he casts his line to the disaffected of Grimsby

    Fishing is on Nigel Farage's mind

    Ukip leader casts a line to the disaffected
    Who is bombing whom in the Middle East? It's amazing they don't all hit each other

    Who is bombing whom in the Middle East?

    Robert Fisk untangles the countries and factions
    China's influence on fashion: At the top of the game both creatively and commercially

    China's influence on fashion

    At the top of the game both creatively and commercially
    Lord O’Donnell: Former cabinet secretary on the election and life away from the levers of power

    The man known as GOD has a reputation for getting the job done

    Lord O'Donnell's three principles of rule
    Rainbow shades: It's all bright on the night

    Rainbow shades

    It's all bright on the night
    'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

    Bread from heaven

    Dutch survivors thank RAF for World War II drop that saved millions
    Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

    How 'the Axe' helped Labour

    UK will be 'run for the wealthy and powerful' if Tories retain power
    Rare and exclusive video shows the horrific price paid by activists for challenging the rule of jihadist extremists in Syria

    The price to be paid for challenging the rule of extremists

    A revolution now 'consuming its own children'
    Welcome to the world of Megagames

    Welcome to the world of Megagames

    300 players take part in Watch the Skies! board game in London
    'Nymphomaniac' actress reveals what it was really like to star in one of the most explicit films ever

    Charlotte Gainsbourg on 'Nymphomaniac'

    Starring in one of the most explicit films ever
    Robert Fisk in Abu Dhabi: The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers

    Robert Fisk in Abu Dhabi

    The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers
    Vince Cable interview: Charging fees for employment tribunals was 'a very bad move'

    Vince Cable exclusive interview

    Charging fees for employment tribunals was 'a very bad move'
    Iwan Rheon interview: Game of Thrones star returns to his Welsh roots to record debut album

    Iwan Rheon is returning to his Welsh roots

    Rheon is best known for his role as the Bastard of Bolton. It's gruelling playing a sadistic torturer, he tells Craig McLean, but it hasn't stopped him recording an album of Welsh psychedelia
    Morne Hardenberg interview: Cameraman for BBC's upcoming show Shark on filming the ocean's most dangerous predator

    It's time for my close-up

    Meet the man who films great whites for a living
    Increasing numbers of homeless people in America keep their mobile phones on the streets

    Homeless people keep mobile phones

    A homeless person with a smartphone is a common sight in the US. And that's creating a network where the 'hobo' community can share information - and fight stigma - like never before