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UK faces negative equity crisis

Britain is on course for a re-run of the negative equity crisis of the early 1990s, with one in seven UK homeowners facing the prospect of having a property worth less than their mortgage, the ratings agency Standard & Poor's said today.

The company predicted that house prices would tumble by a further 17% over the next year, prompting a rise from 70,000 to 1.7m households in negative equity - the same as at the depth of the housing-market meltdown of the early 1990s.

Andrew South, a credit analyst at S&P, said: "The downward trend in UK house prices now seems well established, and we expect prices to continue falling in the near term".

House prices have been falling at their fastest rate on record in recent months, but the previous boom in property values means that only a fraction of Britain's home-owners - 0.6% - are currently in negative equity. The average UK mortgage is for 54% of the value of the home.

S&P warned, however, that for every further percentage point fall in house prices, a further 0.5%-1.5% of borrowers (between 60,000 and 180,000) could enter negative equity. Noting that the trough in the cycle would not be reached until 2009, S&P said: "At this point, we expect 1.7 million borrowers - around 14% - would be in negative equity."

The company said borrowers in the buy-to-let and sub-prime sectors were most at risk from negative equity. "A further 17% decline in house prices could put around 24% of noncomforming borrowers into negative equity, compared with only 13% of prime borrowers."

A return to the negative equity levels of the early 1990s would put additonal pressure on the government to help homeowners. Alistair Darling received an interim report yesterday on the mortgage market from the former HBOS chief, James Crosby, and is expected to come up with proposals in the autumn pre-budget report.

The Nationwide, one of Britain's mortgage lenders, will release fresh figures on the state of the housing market tomorrow.

http://www.guardian.co.uk/global/2008/jul/30/housingmarket.property