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
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Guru Careers: Pricing Analyst

    £30 - 35k: Guru Careers: We are seeking a Pricing Analyst to join a leading e-...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE £45K YR1: SThree: At SThree, we like to be dif...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + competitive: SThree: Did you know? SThree is a mul...

    Guru Careers: C# Project Team Lead

    £55 - 65k (DOE): Guru Careers: A unique opportunity for a permanent C# Develop...

    Day In a Page

    Fifa corruption: The 161-page dossier that exposes the organisation's dark heart

    The 161-page dossier that exposes Fifa's dark heart

    How did a group of corrupt officials turn football’s governing body into what was, in essence, a criminal enterprise? Chris Green and David Connett reveal all
    Mediterranean migrant crisis: 'If Europe thinks bombing boats will stop smuggling, it will not. We will defend ourselves,' says Tripoli PM

    Exclusive interview with Tripoli PM Khalifa al-Ghweil

    'If Europe thinks bombing boats will stop smuggling, it will not. We will defend ourselves'
    Raymond Chandler's Los Angeles: How the author foretold the Californian water crisis

    Raymond Chandler's Los Angeles

    How the author foretold the Californian water crisis
    Chinese artist who posted funny image of President Xi Jinping facing five years in prison as authorities crackdown on dissent in the arts

    Art attack

    Chinese artist who posted funny image of President Xi Jinping facing five years in prison
    Marc Jacobs is putting Cher in the limelight as the face of his latest campaign

    Cher is the new face of Marc Jacobs

    Alexander Fury explains why designers are turning to august stars to front their lines
    Parents of six-year-old who beat leukaemia plan to climb Ben Nevis for cancer charity

    'I'm climbing Ben Nevis for my daughter'

    Karen Attwood's young daughter Yasmin beat cancer. Now her family is about to take on a new challenge - scaling Ben Nevis to help other children
    10 best wedding gift ideas

    It's that time of year again... 10 best wedding gift ideas

    Forget that fancy toaster, we've gone off-list to find memorable gifts that will last a lifetime
    Paul Scholes column: With the Premier League over for another year, here are my end of season awards

    Paul Scholes column

    With the Premier League over for another year, here are my end of season awards
    Heysel disaster 30th anniversary: Liverpool have seen too much tragedy to forget fateful day in Belgium

    Liverpool have seen too much tragedy to forget Heysel

    Thirty years ago, 39 fans waiting to watch a European Cup final died as a result of a fatal cocktail of circumstances. Ian Herbert looks at how a club dealt with this tragedy
    Amir Khan vs Chris Algieri: Khan’s audition for Floyd Mayweather may turn into a no-win situation, says Frank Warren

    Khan’s audition for Mayweather may turn into a no-win situation

    The Bolton fighter could be damned if he dazzles and damned if he doesn’t against Algieri, the man last seen being decked six times by Pacquiao, says Frank Warren
    Blundering Tony Blair quits as Middle East peace envoy – only Israel will miss him

    Blundering Blair quits as Middle East peace envoy – only Israel will miss him

    For Arabs – and for Britons who lost their loved ones in his shambolic war in Iraq – his appointment was an insult, says Robert Fisk
    Fifa corruption arrests: All hail the Feds for riding to football's rescue

    Fifa corruption arrests

    All hail the Feds for riding to football's rescue, says Ian Herbert
    Isis in Syria: The Kurdish enclave still resisting the tyranny of President Assad and militant fighters

    The Kurdish enclave still resisting the tyranny of Assad and Isis

    In Syrian Kurdish cantons along the Turkish border, the progressive aims of the 2011 uprising are being enacted despite the war. Patrick Cockburn returns to Amuda
    How I survived Cambodia's Killing Fields: Acclaimed surgeon SreyRam Kuy celebrates her mother's determination to escape the US

    How I survived Cambodia's Killing Fields

    Acclaimed surgeon SreyRam Kuy celebrates her mother's determination to escape to the US
    Stephen Mangan interview: From posh buffoon to pregnant dad, the actor has quite a range

    How Stephen Mangan got his range

    Posh buffoon, hapless writer, pregnant dad - Mangan is certainly a versatile actor