The fall in households trapped, down from about 1.25 million in the final quarter of 1995, is the largest decline for almost three years and the first time since 1992 that the number has fallen below the million mark.
The survey, by Rob Thomas, a banking analyst at the Swiss banking group UBS, came as a separate report by Halifax Building Society yesterday showed house prices rose by 1.7 per cent in the year to March.
Annual house price inflation was boosted by last month's figures, during which prices went up 1.5 per cent. In the 12 months to February, house prices rose by just 0.2 per cent.
However, Mr Thomas added that a further 2.1 million householders are still living in homes worth no more than pounds 5,000 above the price they paid for it.
The number of borrowers affected, about three million, are likely to find themselves losing money if they want to buy a new home, he added. Almost 30 per cent of mortgaged households are in such a position.
Of those in negative equity, where the value of a home is less than the mortgage paid on it, almost three-quarters are first-time buyers.
Mr Thomas said: "It is a big fall, and is probably just what the Government wants to hear. For the past three years, the number of those affected has been marking time. This is the first significant move downwards. There have been false dawns in recent years, which has made commentators understandably cautious about the sustainability of any upturn in house prices.
"Hopefully, this will prove to be a genuine step in the number of affected households, but the normal spring buying season will be crucial."
He added that the decline in negative equity could tail off if house prices fail to sustain the rapid recovery seen this year.
Mr Thomas's report contrasts sharply with a separate one issued earlier this year by Nationwide Building Society, claiming that the number of households in negative equity in 1995 rose to 1.7 million.
A Nationwide spokesman claimed that his society's calculation was based on different, but more accurate, estimates of the amount borrowed relative to the value of a house.
The society's own figures did not yet show such a significant fall, he added, although a 3 per cent rise in prices during 1996 would lift up to 300,000 homeowners out of the trap.
The housing trap
Average number of households affected by negative equity
1989 - 90,000
1990 - 410,000
1991 - 590,000
1992 - 1,170,000
1993 - 1,360,000
1994 - 1,160,000
1995 - 1,130,000
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