Negative equity is looming

More than 300,000 households will be in negative equity by 2007, a report warns today.

Most of them are expected to be in London (137,000 homes) and the rest of the South-East (85,900).

The problem will not be as serious as it was after the homes market crashed in 1989, when it was compounded by crippling interest rates and rising unemployment.

But many people could still find the value of their home dropping below their mortgage.

Worst hit will be those who borrowed-huge mortgages with low deposits to invest in property at peak prices over the past 18 months.

However, rising house prices from 2007 onwards should ensure that by the end of 2009, all households who survive the lean times will be lifted out of negative equity.

The analysis comes from Roger Bootle, one of the Bank of England's "wise men" who advised chancellors under the last Tory government.

Mr Bootle's company, Capital Economics, is highly regarded for its analysis and forecasts.

A year ago he said homes in the South-East were overvalued by 23 per cent, and in London by 26 per cent. He also predicted that the effects would not begin to be felt until late this year.

Today, Mr Bootle said: "The threat of falling house prices is now around the corner, and is already happening in some areas.

"The inevitable question is whether or not we are about to see a return of the widespread negative equity of the early 1990s.

"Then, 1.2 million households saw the value of their houses fall below that of their outstanding mortgages, including twothirds of all first-time buyers. Almost half a million lost their homes as a result.

"However, the economic environment is now considerably different, and negative equity would therefore have far less serious consequences than last time round.

"For instance, we predict minimal repossessions due to the low interest rates. In fact, this time round negative equity will have only a limited effect on dampening consumer spending."

In London and the South-East, which saw prices soaring through the late Eighties, prices crashed by up to 50 per cent in places like Newham and Crawley New Town. By 1993 negative equity had spread to more than four in 10 homebuyers with mortgages.