One in 10 homeowners 'in negative equity' - Bank of England » Housing » 24dash.com

One in 10 homeowners was in negative equity during the first quarter of the year, the Bank of England said today.

The Bank estimates that between 7% and 11% of homeowners with a mortgage owed more to their lender than their property was worth during the first quarter, the equivalent of between 700,000 and 1.1 million households.

In addition, around 200,000 buy-to-let investors are also estimated to have owed more on their mortgage than their property was worth, some of whom may also be in negative equity on their own home or on more than one investment property.

The research said the overall number of people who were in negative equity during the first quarter was similar to those who suffered from the problem in the mid-1990s, during the last housing market correction.

It said house prices had fallen by around 20% between the autumn of 2007 and the spring of 2009, the largest nominal fall in property values on record.

But despite the steep drop, it found that the majority of homeowners had large equity cushions, while for others the total value of negative equity was relatively small.

The research suggested that between 73% and 78% of households who were in negative equity faced a shortfall of less than £15,000, and between 56% and 65% had one of less than £10,000.

At the same time, three-quarters of all households with a mortgage owed less than 75% of their home's value to their lender during the first quarter.

The report also pointed out that the overall financial position of a household was important when assessing the impact of negative equity, as the issue was less of a concern for people who had additional assets, such as savings or investments, while it was more of a problem for people who had additional debt.

The Bank said the effects of negative equity could be painful for households, and it warned it could lead to a reduction in consumer spending and restrict households' mobility, which has a knock on effect on tax receipts and spending on housing market services, such as estate agents' fees, and certain goods.

It added that rising levels of negative equity could also lead to a reduced supply of credit to the economy as a whole, as it could increase the losses that lenders incur if borrowers default on their mortgage.

This in turn can make banks less willing or less able to supply credit to households and firms.

Being in negative equity can also increase the risk of a borrower defaulting on their mortgage, as if they run into payment difficulties, they do not have equity in their home to fall back on.

There are no figures which accurately measure the number of people who are in negative equity, so the Bank based its estimates on three studies, one of which was a survey of mortgage holders, the second used data from the Financial Services Authority, and the third used lenders' own data.