Fears of new negative equity crisis as home loans spiral

Homeowners are borrowing a record £133m a day against their properties, figures from the Bank of England reveal, heightening fears that millions could plunge into negative equity if the housing market crashes.

Britons withdrew £11.98bn from the value of their homes – on top of their existing mortgages – between July and September last year, the largest amount borrowed in this way and, as a proportion of householders' disposable income, the second highest since modern records began in 1970.

The only time consumers saddled themselves with more debt was in the autumn of 1988, when the housing market was approaching a peak that heralded a crash. As prices fell, millions of families found their homes worth less than their debt – a phenomenon known as negative equity.

The rise means homeowners are, in effect, betting on a continuing house-price boom by increasing their mortgage in exchange for a lump sum to cash in on the rise in the value of their property since they bought it. This device – mortgage equity withdrawal – has been a crucial support for UK economic growth at a time of global turmoil. It has persuaded Britons to continue spending despite falling share prices, 11 September, an American recession and the crisis over Iraq.

But with signs that the housing market is already slowing and some housing experts forecasting a price crash, fears are growing that some households could be left high and dry. Jonathan Loynes, chief UK economist at Capital Economics, a consultancy that forecasts a 20 per cent slump in housing prices over the next four years, said the position was worrying.

He said yesterday's figures showed how crucial the housing market had been in keeping the UK out of recession last year by encouraging people to spend. "But, if one were to see a fall in the value of those [housing] assets, then I don't think people would borrow so freely and they might try to pay off their debt rather than spend in order to rebalance their finances," he said.

"The more evidence there is that the current strength of spending has been driven by the housing market, the more worrying that is as most people believe the current strength [of house prices] is unsustainable."

The Bank of England is also worried about the impact to the economy of a house-price crash. Late last year Mervyn King, who takes over as governor in June, warned – in typically dry economic language – of a "negative-demand shock" if prices slumped. Its own figures showed homeowners paid back almost £10bn of mortgage debt in the mid-1990s after the crash that decade. But other economists said that, although the amount of money withdrawn had posted a new record for every quarter since the summer of 2001, it was only 6.6 per cent of households' post-tax income – still far short of the peak of 8.1 per cent in the autumn of 1988.

Simon Rubinsohn, chief economist at Gerrard stockbrokers, said: "Although the scale of capital extracted from properties has risen sharply over the past few years, we do not believe this to be a problem. Over the course of the 1980s the cumulative volume of equity withdrawal was significantly larger in real terms, which in part explains the subsequent vulnerability of homeowners to the drop in house prices. At present this appears less of a danger."

The mortgage industry also played down fears that banks and building societies were contributing to a huge debt bubble, but urged borrowers to take care. Bernard Clarke, a spokesman for the Council of Mortgage Lenders, said: "We would simply urge consumers to assess carefully what is likely to happen to future interest rates, their job prospects and their continuing ability to repay their loans, but beyond that I would imagine that current lending is sustainable."

Alex Bannister, group economist at Nationwide Building Society, said even if interest rates were to rise to 5 or 6 per cent few people would have trouble paying the mortgage. "Equity withdrawal is not a major problem now but if it doesn't begin to moderate during the year I think the [Bank] will become concerned," he said.