Bank of England: 1.2million face negative equity as property slumps

More than one million homeowners will fall into negative equity as the housing market slump intensifies, the Bank of England warns today.

Around 500,000 homeowners are already in negative equity

The continuing decline in house prices means that one in ten mortgage holders - 1.2 million people - are likely find themselves trapped in a home worth less than the loan they took out to pay for it.

Around 500,000 homeowners are already in negative equity following a drop in house prices of almost 15 per cent from last summer's peak, the Bank's figures indicate.

However, it is the further falls in prices to come that will push another 700,000 of Britain's 11.7 million mortgage holders into negative territory.

The warning, in the Bank of England's twice yearly Financial Stability Report, underlines recent predictions from City experts that the UK is facing a recession which could be as bad, or worse, than the early 1990s. It illustrates how the effects of the financial crisis are spreading ever wider into the real economy.

The report also warns that banks will cut back on their lending in the coming months, so worsening the credit squeeze facing families.

It says that the financial crisis has escalated to the worst to face the UK since the start of the First World War, with the total amount of losses throughout Europe and the US now mounting to just under $3 trillion (£1,900 billion).

The report came on another day of turmoil for the UK economy. The FTSE 100 index of leading shares fell 5 per cent on opening to its lowest level for almost six years before recovering later, while the value of the pound against the dollar slumped to a five year low of just $1.5468 - compared with more than $2 only six months ago.

With the UK economy now shrinking for the first time since the last recession in 1992, Gordon Brown yesterday pledged to spend to bring Britain out of recession, while his new Business Secretary Lord Mandelson warned that the scale of current financial crisis was "unparalleled".

"I don't think people have yet realised what the impact is going to be on the real economy, on businesses and jobs back at home," he said.

Negative equity is regarded as among the most painful economic problems for families, since those affected cannot move without paying their mortgage company the difference between the value of their home and the loan they took out to buy it.

The Bank bases its prediction on a further drop in house prices of another 15 per cent in the coming months. Many experts have predicted falls of even greater than this before a recovery.

The warning is remarkable, since until recently the Bank had maintained that very few homeowners would be affected by the problem. It will spark fears that many more homeowners will face repossession in the coming months, as they struggle to keep up their mortgage payments.

During the early 1990s some 1.8 million households were trapped by negative equity, and the Bank's calculations indicate that the total toll this time could ultimately reach similar levels if there is no let up in the house price plunge.

The stability report, which is the Bank's six-monthly assessment of the health of the financial system, says: "While house prices were rising, many households had accumulated substantial buffers of housing equity. Falls in house prices reduce the size of these buffers and, for some borrowers, could result in negative equity."

Separate research from Standard & Poor's, the ratings agency, also recently predicted that some 2 million homeowners could soon face negative equity.