One million households could be in negative equity

More than one in ten households may have fallen into negative equity, the Bank of England said on Friday, similar to levels seen in the mid-1990s.

The central bank estimated in the first quarter of 2009 between 700,000 and 1.1 million homes were in negative equity -- where homeowners owe more on their outstanding mortgage than their property is worth.

House prices have fallen sharply following increases in borrowing costs during the credit crunch and then a loss of confidence and spending power during the recession.

There have been signs that the housing market -- and the economy -- could be starting to improve, but many banks remain reluctant to lend and policymakers are unsure about how sustainable recovery will be.

The BoE cautioned there was a great deal of uncertainty around its estimates of negative equity.

"Nevertheless, rising loan-to-value ratios during 2008, as indicated by higher estimates of the number of households in negative equity, are likely to have had economic consequences," the BoE said in its quarterly bulletin.

If correct, the BoE figures suggest up to 11 percent of households were in negative equity in the first three months of the year.

"The majority of mortgagors continued to hold significant buffers of housing equity with an estimate based on a household survey suggesting that over 75 percent of mortgagors had an LTV ratio of less than 75 percent," the BoE said.

"Estimates also indicate that the majority of those that had fallen into negative equity by 2009 Q1 had relatively small values of negative equity; though that would increase in the future if house prices fell further."