Up to 1.7 million households have negative equity, and a further million borrowers own homes whose value hovers no more than pounds 3,500 above their mortgage, according to Nationwide Building Society.
The new figures represent a setback for the Government, after John Major put himself at the head of a drive to persuade voters that the economic outlook for this year was improving. Ministers have repeatedly pointed to the rise in real incomes, maturing Tessa accounts and signs of recovery in the housing market as the basis of their optimism about political recovery.
But the Nationwide survey raises doubts over whether millions of homeowners can be persuaded of the elusive "feelgood factor" with a general election little more than 15 months away.
Nick Raynsford, Labour's housing spokesman, said: "Negative equity has a very damaging impact on confidence in the housing market, which shows no sign of recovering, despite all the hype we've heard from people with a vested interest - principally the Government."
Nationwide said that about 150,000 households plunged into negative equity after last year's collapse in house prices, affecting one in seven of all borrowers. The additional one million only just above that level is also critical, many housing experts believe.
The costs of moving home, including stamp duty, legal fees and estate agents' commission means the next step on the housing ladder would leave buyers in the red.
If house prices rise by 3 per cent during 1996, as predicted, more than 300,000 households will be lifted out of negative equity. Borrowers above that line would also gain from any price increase.
But that would still leave a vast reservoir of millions of disillusioned homeowners trapped in their homes almost a decade after rushing to join the property boom of the late 1980s.
A spokeswoman for Shelter, the housing campaign group, said: "People who have negative equity are often also people who have problems with mortgage arrears.
"If you are living in a home that is worth less than your mortgage, you are less able to move, especially if you are also unemployed. The traditional tactic of trading down become much more difficult."
The Nationwide's survey comes on the eve of a report on repossessions and arrears by the industry's trade body, the Council of Mortgage Lenders. The council is expected to say that repossessions remained broadly flat last year, at about 50,000. The numbers of people in arrears are thought to have fallen.
The survey comes in the midst of a desperate mortgage price war by lenders. A separate report by TSB claimed the cost of home buying will fall by 10 per cent this year, buoyed by a combination of falling mortgage rates and rising earnings. In 1996, home buyers will spend pounds 25.70 on a mortgage for every pounds 100 of their take-home income, compared to pounds 30 last year.
Nationwide's figures are higher than those regularly produced either by the Department of Environment or Woolwich Building Society. This is because Nationwide bases its findings on a higher, but more accurate, percentage of loans usually taken out by borrowers.
The society said yesterday that the increase in negative equity had been caused mainly by relatively small falls in house prices. A disproportionate number of households can be affected either way by minor price changes because their mortgages is so close to the selling price of a home, Nationwide said.
"Its significance for individual households should not be exaggerated," its quarterly housing finance review claimed.
"Equity shortfalls of those newly affected are likely to be small. In most cases, households are quite likely to be unaware of the 'problem' since it is dependent on the existing value of their individual property, something they will only know with any accuracy if and when they wish to sell."
The society said that while the number of negative equity cases rose overall, the total value of those suffering from it fell slightly from pounds 8.6bn to pounds 8.3bn, reducing the average shortfall to pounds 4,900 from pounds 5,600.
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