House price falls are forecast to drive an additional 50,000 households into negative equity, analysis has revealed.
This would leave approximately 166,000 homeowners with a property that is worth less than the value of their remaining mortgage.
The strongest concentration of households in negative equity is forecast to be in the West Midlands and in Wales.
The projections, along with a prediction that house prices would fall by around 6.5 % from their peak in Q4 2022 to Q2 2025, were made by the National Institute of Economic and Social Research (NIESR) in its Autumn Economic Outlook.
A combination of rising interest rates and falling real disposable personal income has driven down demand for house purchases, it said. Higher interest rates have reduced borrowing capacity which, when combined with a sharp fall in real disposable personal income, has already reversed a near fifteen-year trend of rising house prices.
NIESR projects that lower demand will continue to dampen house prices, with a steady fall in property values up until the second quarter of 2025.
Falling house prices, said the NIESR, entails ‘acute financial challenges’.
“Not least because it reduces household wealth, as the value of their most expensive asset decreases, but also because it reduces a household’s ability to take out loans secured against their property,” it said.
“Falling house prices therefore translates into a reduced ability to borrow. Given the importance of borrowing throughout the cost-of-living crisis, this suggests a constrained ability to continue to do so in the short to medium term.”
Base rate to settle around 3% mark
The research institute believes that interest rates have already reached their peak at 5.25% and will not come down until late next year. It expects the base rate to settle between three and 3.5%, which is lower than the financial market’s view of just over 4%.
Inflation is not expected to return to the two per cent target before the end of 2025. As CPI inflation continues to fall, wage inflation will outpace price inflation, raising incomes and living standards, though not to pre-pandemic levels.
