Citibank: Million homeowners face negative equity

Nearly one million UK homeowners face a realistic threat of slipping into negative equity, according to a report from international investors Citibank.

The organisation's chief economist Michael Saunders is now predicting prices could slip by 15 per cent this year – leaving up to 950,000 with homes losing value in real terms.

Those who purchased in the last two or three years, during the height of the boom, are likely to be the most severely affected.

"Recent trends in housing activity have been even weaker than our previous gloomy base case," finds the report.

"With weak demand, tightening credit availability and the unwind of the buy-to-let bubble, we now expect house prices to fall by a total of 15 per cent over 2008 and 2009 combined, versus our previous base case of a ten per cent drop."

At the end of 2007 only a handful of experts would have given credence to such a dramatic fall in average property prices.

However, recent falls illustrated by Halifax and Nationwide suggest a fall of 15 per cent is now not unrealistic.

Halifax, for example, finds house prices fell by 2.4 per cent in May alone, with year-on-year averages down 3.8 per cent.

Industry analysts Global Insight now predict prices could fall by 12 per cent in both 2008 and 2009, while the Council of Mortgage Lenders (CML) predicts prices could fall seven per cent.

However, the threat of negative equity should not strike fear into the hearts of homeowners as it once did, argues analyst Jeremy McGivern.

Comparing the present slowdown to that of the late 1980s, Mr McGivern said: "The people who lost out then were those who could not afford their mortgages and were repossessed.

"Many more people went into negative equity, but were not affected because their finances were sound.

"They probably did not feel particularly great about the situation, but if they bought at the end of 1989 and held onto that property until now, they will have made a lot of money."

In short, button down for the long term and the storm is likely to pass.

Chris O'Toole