Is the ghost of negative equity returning?

Dropping the phrase ‘negative equity’ into conversation at a dinner party is likely to lead to immediate social pariah status. Our memories are dulled by time, but less than fifteen years ago, over a million and a half households in the UK felt the chill wind of a housing recession which left them with properties worth less than their unpaid mortgage debt. Whisper it quietly but the ghost of negative equity is making a comeback.

The credit reference agency Experian has produced a risk map of Great Britain highlighting the areas where homeowners are at severe risk of falling into the negative equity trap. Looking at the microeconomic data - individual post code areas each with less than 2,500 properties, the warning bells are ringing loudest for people whose average mortgage loan to house price value ratios are more than 90 per cent.

The figures are even more alarming when looked at on the basis of individual postal sectors, each of which contains around 2,500 homes, which shows that the average loan to value ratio in five areas is more than 90%. Calderwood Street in London, Chorlton Road in Manchester, Chatham High Street and Stoney Street in Nottingham are fit into this group. We are not told what fate awaits the highly leveraged mortgage payers of Arcacia Avenue.

People who have bought properties near the top of the market and with a high ratio of mortgage debt to dispoable income are certainly at risk. It would not take much of a dip in property prices for the number of people officially in negative equity to start rising quite quickly. Experian calculate that, in total, nearly 300,000 homes in Britain are in areas with an average mortgage debt of more than 70 per cent in relation to property prices.

Property prices are falling in many parts of the country - although the overall annual rate of house price inflation for the UK (using data from the Halifax and Nationwide house pric indices) remains positive. Negative equity need not necessarily be a problem for people prepared to tough it out, delay a property sale and ride the current turbulence in the property market. But if prices do start to fall quite sharply, one can envisage a strengthening connection between stories of negative equity and a fall in consumer confidence.