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1.2million homeowners face negative equity as house prices continue to crash

28 October 2008 / by Rachel Mason
More than a million homeowners could find themselves in negative equity as the housing crisis continues, said the Bank of England.

In its Financial Stability Report, the Bank of England has predicted that 10 per cent of homeowners will soon find themselves in negative equity as a result of falling house prices.

Currently, around half a million homeowners owe more on their mortgage than their houses are worth, but with a further 5 per cent fall in house prices, the Bank of England expects to see negative equity hit one in ten homeowners – around 1.2 million people.

"While house prices were rising, many households had accumulated substantial buffers of housing equity," said the report. "Falls in house prices reduce the size of these buffers and, for some borrowers, could result in negative equity."

The Bank of England says that it is borrowers with high loan to value (LTV) rations and those with buy to let mortgages that will be worst hit.

"Since 2000, LTVs for first-time buyers have averaged 90 per cent, compared to 80 per cent for all mortgages for house purchase.

"In the BTL market, tighter credit conditions, combined with falling house prices and rising LTVs, are likely to lead to substantial refinancing costs for many landlords.

"In recent years, expected capital gains from house price appreciation may have made landlords willing to subsidise these costs. But falling house prices — and expectations of further falls — may erode this willingness and lead to increased arrears and/or selling of properties."

© Fair Investment Company Ltd