One in ten homeowners fell into negative equity during the first three months of the year, the highest proportion for 15 years, the Bank of England said today.

The Bank estimated that between 7 and 11 per cent of homeowners with a mortgage owed more to their lender than their property was worth, the equivalent of 700,000 to 1.1 million householders.

Negative equity may have amplified the speed and scale of the recession, the Bank said in its Quarterly Bulletin.

“Large losses on mortgage loans and associated securities can erode banks’ capital positions, affecting both lenders’ willingness and ability to lend and, in extreme cases, their solvency.”

Around 200,000 buy-to-let investors were also estimated to owe more on their mortgage than their property was worth, in a sector particularly battered by the economic downturn.

The research said that the overall number of those in negative equity during the first quarter of 2009 was comparable with those who suffered the problem in the mid-1990s, during the last housing market correction.

The Bank said house prices had fallen by around 20 per cent between the autumn of 2007 and the spring of 2009, the largest nominal fall in property values on record. In contrast, it took six years for house prices to fall by 15 per cent between 1989 and 1995.

But despite the steep drop, the Bank’s research suggested that between 73 per cent and 78 per cent of households who were in negative equity faced a shortfall of less than £15,000, and between 56 per cent and 65 per cent had one of less than £10,000.

Encouragingly, three-quarters of all households with a mortgage owed less than 75 per cent of their home’s value to their lender during the first quarter.

The bulletin said that the UK’s biggest banks lent five times the value of their shareholder’s capital in home loans. In turn, 40 per cent of mortgage debt was packaged up and sold to raise more loans, increasing the risk of losses, the Bank said.

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. A survey of mortgage holders, data from the Financial Services Authority, and the lenders’ own data.

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