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Negative equity could be reality for one in ten homeowners

18 April 2008 / by Rachael Stiles
One in 10 homeowners could find that their mortgage is worth more than the value of their house, as property prices could drop 15 per cent in the next two years.

Leading investment bank Morgan Stanley has released a subdued report about the UK housing economy which, in a worst case scenario, could see house prices come down as much as 25 per cent over the next two years, causing negative equity levels unseen since the property market crash of the early 1990s.

Those affected by negative equity will not be able to move house because they would not be able to clear their mortgage with capital from the sale of their home, so they must either stay where they are for the time being or suffer a loss for selling up.

For those people who have no call to sell their home, are happy where they are and can afford to pay their mortgages, if they bought their homes at the height of the boom the situation is financially disheartening, but not catastrophic.

The worst hit will be those who are forced to sell their homes because they can no longer afford their mortgage repayments in the current financial climate. These unfortunates will find that the value of their home is not enough to pay back the mortgage and they could be left owing their lender thousands of pounds with nothing to show for it.

The report said that further falls in house prices are very likely, and that if the average house price drops in value by 15 per cent, then this would create £164 billion of negative equity by 2010.

The situation is exacerbated for those who took out home loans for 100 per cent or more on the value of their house; last year, £77 billion was lent to these borrowers, and they will find that remortgaging could be nigh on impossible as mortgage rates continue to rise and a growing number of providers tighten their lending criteria and withdraw mortgage products, particularly for first time buyers who now need to find a deposit of at least five or ten per cent to get a competitive deal.

However, while such a severe drop in house prices at a time when people cannot afford to pay their mortgages could lead to many owning homes that are only worth what they were at the beginning of 2006, "the great majority of them would have a small amount of negative equity", Professor David Miles, author of the Morgan Stanley report, told The Times.

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