Fifth of households face negative equity

03 November 2008

Homeowners in trap as house prices plunge

According to new City estimates, over a fifth of all households, or 3 million homeowners, could end up in negative equity, with mortgage arrears greater than the value of their properties, because of plunging house prices.

Calculations from the Bank of England showed that the number of homeowners in negative equity could increase to 1.2 million by 2011, up from around half a million today. However, these are seen as too optimistic.

Michael Saunders, of Citigroup, said that the estimates from the Bank are overly optimistic because they are based on a survey which asks a sample of homeowners for details including the value of their property and details of their debts. This led Mr Saunders to highlight earlier research by the Bank, which demonstrated that homeowners usually overestimate the value of their properties by as much as 20% but underestimate the value of their debts by around 10-15%.

When taking this bias into account, he calculates that house prices will drop by a further 15% - in addition to the 15% drop over the past year – and will therefore leave between 2.5 and 3 million homeowners facing negative equity.

Mr Saunders said: “Widespread negative equity is likely to exert a lasting drag on spending as households save more, while also hitting the credit quality of lenders’ assets and adding to the caution over high debt levels among both lenders and borrowers.”