Negative equity, that scourge of the UK economy in the early nineties is once again stalking the land. Nearly four million homeowners are now in, or close to, negative equity according to research group GfK NOP.  

The figure is based on a survey with 60,000 UK householders and is by far the bleakest assessment of the effect of the slump in house prices. The report suggested that young people who took out mortgages at the peak of the market were most affected.  

However, some commentators in the industry have suggested that the figure as “extreme”. Other estimates have suggested two million fewer were at risk.  

It is worth noting that in the short term, negative equity is generally only a significant issue for homeowners if they need to move. Otherwise, when the market begins to rise again the deficit disappears. 

The GfK NOP research suggested that about one in three mortgage-holders were in negative equity, that is, they owe more on a mortgage than their home is worth. This was twice the number than in the house price slump of the 1990s.  

Researchers asked how much owners bought their properties for and with what kind of mortgage. They then compared this with the house price index produced by the Halifax, which estimated that property prices had dropped by 17.2% in the last year.  

The report found that single people aged between 25 and 34, young couples and young families, who took out mortgages with very small or no deposit since 2005, were most at risk.  

GfK Financial said that many people had been relying on the growing value of their home to supplement their income or their retirement fund. “The shift to negative equity has the potential to be a mammoth welfare disaster for the nation. The reality is that if there are further job cuts, the problem will become significantly worse.”  

The chief economist of the Royal Institution of Chartered Surveyors (Rics), was the most prominent figure to play down the statistics. He said that he regarded the latest estimate as “a little extreme”.  

“The GfK report has highlighted an important point that negative equity has returned and is getting worse. But when you make an assessment of negative equity, you have to make significant assumptions. There is a danger of people becoming obsessed with negative equity when they are not planning to move.” 

It is generally considered that the psychological impact of negative equity is greater than the actual effect. The proportion of owners selling, even in 2007, was no more than 8%.  

The volatility of the market makes it extremely difficult to judge the value of properties at present, and house price surveys are giving varying results. Most homeowners entered the market when the loan-to-value ratio of mortgages was more likely to be down at 60%, rather than 95%.  

The actual impact of negative equity generally strikes when people were forced to move. This could be caused by a change of job to a new area, family break-up or downscaling because of a loss of income during the recession.  

The general rule with negative equity is to be aware of the threat but do not overreact. Unless you are forced to move the market will begin to grow again, the price of your house will rise and negative equity will not directly affect you.