LONDON (Reuters) - Some 70,000 homeowners are currently in negative equity and that figure could rise to 1.7 million if house prices decline by a further 17 percent, according to Standard & Poors.
The rating agency calculates that for every further percentage point decline in house prices, a further 0.5-1.5 percent of borrowers -- the equivalent of 60,000 to 180,000 homeowners -- could enter negative equity.
After a decade in which property values have jumped three-fold, house prices have fallen by around eight percent in the past eight months.
The speed of the decline has raised the spectre of a return to the dog days of the early 1990s when around two million homeowners were left in negative equity and many had their properties repossessed.
At the height of the housing boom, lenders were scrambling over themselves to lend money, often offering 100 percent mortgages and five times income.
S&P is forecasting that house prices could drop by a further 17 percent before the market flattens in 2009.
"Our verdict is that the house price correction will be sharper but shorter than last time," said Andrew South, credit strategist at S&P.
In the early 1990s, British authorities were unable to cut interest rates because of the need to keep sterling in the Exchange Rate Mechanism. This time round, the Bank of England is hamstrung by above-target inflation.
Still, with the economy slowing sharply and oil prices having fallen to a three month low, most analysts expect several rate cuts next year.
Source: http://uk.biz.yahoo.com/30072008/325/risk-negative-equity-rising.html
