Million homeowners on verge of negative equity

Tuesday, 24 June 2008 12:00 AM

Around one million homeowners are on the verge of slipping into negative equity on their property, a leading expert warned last night.

Professor David Miles, managing director of Morgan Stanley Research, warned that a high number of recent home buyers on high loan-to-value (LTV) mortgage deals could be facing negative equity.

"A substantial number of people will be in negative equity. If house prices fall 15 per cent, one million could be in negative, but this is not apocalyptic," he said at the Westminster Economics Forum hosted by the National Institute of Economic and Social Research (NIESR).

"The majority of people will just be in negative equity," explained Mr Miles, suggesting the scenario is not as damaging as may be expected.

Those most likely to face some level of negative equity were predicted to be people who had recently signed up to a high loan-to-value mortgage.

"But if you can still make monthly payments, then there is not a terrible condition. [It is not a problem] if you are not selling and the mortgage is affordable," Professor Miles continued.

Central to difficulties in predicting where house prices will go, Professor Miles explained, was the role of house price expectations.

In part recent house price growth in the UK was attributed to high house price expectations. Expectations of falling house prices may also bring down house prices.

Professor Miles was also circumspect on suggestions house price falls and rising interest rates would lead the UK to recession.

His analysis showed in a central case, a ten per cent house price fall in 2008 and a 0.5 per cent rise in interest rates would see a one per cent fall in GDP growth, which would not be enough to bring the UK into recession.

Daniel Barnes

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• uk property news