10% of homeowners 'could be plunged into negative equity'

Up to one in 10 families could be plunged into negative equity if house prices fall by 15%, an investment bank warned today.

Economists at Morgan Stanley are predicting house price falls of up to 10% this year, followed by a further drop of 5% in 2008.

In a report on the UK housing market, they warned that if these falls materialised, 10% of mortgages would be for a higher sum than the value of the property they were taken out on, meaning homeowners would be in negative equity.

The research added that the situation could be even more severe, with house prices falling by 25% during the coming two years under its most pessimistic forecast.

The group said that, during the past few years, nearly half of all lending for house purchase had been at loan to value (LTVs) ratios of 80% or higher.

As a result it estimates that a 15% fall in house prices would lead to £164 billion worth of negative equity, once people with mortgages on lower LTVs are factored in.

It added that the actual figure could be higher, as its calculations exclude mortgage lending in 2008.

But the group said that, while the double-digit falls sounded bad, a 20% fall in house prices over the coming two years would just take average nominal house prices back to where they were at the start of 2006.

Morgan Stanley expects the housing market slowdown and the credit crunch to also impact the mortgage market, predicting net lending of just £65 billion this year, down from £108 billion in 2007.