Negative equity risk for 1.2 million homes

LONDON (Reuters) - About 1.2 million households could fall into negative equity if the housing slump continues during the global economic downturn, the Bank of England said on Tuesday.

In its twice-yearly Financial Stability Report, the bank said a 15 percent drop in prices from their October 2007 peak would leave one in 10 homeowners with outstanding mortgage debt worth more than the value of their home.

"House price forecasts suggest further falls, although the size of these falls is highly uncertain," the report said.

A global shortage of capital has forced many banks to restrict lending, choking the housing market. Prime Minister Gordon Brown warned last week that Britain is likely to suffer a recession.

The bank's report said house prices have dropped faster in Britain than in the United States. They are down 13 percent from their peak and are close to the total nominal fall seen during the last recession in the early 1990s.

First time buyers would be among those hardest hit by falling house prices, the bank added. They are more likely to have had a smaller deposit and would have borrowed more to get a foot on the housing ladder, making them more vulnerable.

Buy-to-let landlords may fall behind on mortgage payments or be forced to sell at a loss as lending dries up and their investments lose value, the report added.

Two further sets of figures provided more bleak news for the housing market on Tuesday.

The Financial Services Authority said the number of home repossessions in the second quarter rose to 11,054 from 9,172 in the previous three months.