Some 900,000 home owners have now fallen into negative equity after a prolonged period of house price falls, the Council of Mortgage Lenders (CML) has revealed.
The trade body’s research shows that around two thirds of these home owners face only modest shortfalls of less than 10 per cent, equating to around £6,000 in negative equity for first-time buyers and £8,000 for other home buyers.
The greatest numbers of negative equity cases are seen for mortgages taken out at the peak of house prices between the second and third quarters of 2007. The CML said house prices had fallen by around 18 per cent nationally by the end of last year. Indices from Nationwide and Halifax state they have fallen further in the past three months on average.
In comparison to the last recession, the CML said that during the trough of the market in early 1993, estimates of households in negative equity were upwards of 1.5 million. Most borrowers saved, continued to pay their mortgages and eventually recovered their equity position and many are expected to do the same now.
A recent study by GfK estimated that almost four million borrowers are now "at risk of negative equity" rising to around five million by the end of the year. The CML said it does not have sufficient detail on the GfK methodology used, but added that it would seem "implausible" that this figure could be more accurate than the consensus range of estimates.
The CML added that one unfounded myth is that there is a strong causal link between negative equity and mortgage repayment problems. It said this is not true and that payment problems are typically associated with unexpected spending commitments, reduced income and changes in household circumstances. Negative equity, on the other hand, only surfaces as a problem if households need to move, or are also experiencing repayment difficulties.
Bob Pannell, head of research for the CML, said: "Although negative equity has resurfaced as house prices have fallen, one big difference from the early 1990s downturn is that it is less concentrated among young, first-time buyers, and more evenly spread across wider age groups and those at different points on the housing ladder."
Panell said that negative equity will contribute to subdued property turnover, but otherwise should have few adverse effects for the majority of households affected.
He added: "Where people needs to move house for job or other priority reasons, lenders can often be flexible to existing borrowers with low or negative equity, as long as their financial position is sound and they have a good payment track record.
"Otherwise, sitting tight and building up savings or overpaying on the mortgage are the strategies most borrowers are likely to adopt. It should be easier for households to rebuild their equity position than in the early 1990s, as low interest rates on their mortgage can help them to save or overpay more quickly."
