The UK housing market is unlikely to recover before 2011, according to a leading estate agent, as it emerged today that 1.3 million homeowners face negative equity if prices continue to fall.

Savills, which specialises in selling upmarket properties in the South East and London, made its gloomy prediction in its latest report on the residential housing market.

The company blamed restrictive mortgage conditions for the delay to any market recovery, citing the Financial Services Authority's report in July that availability of mortgages will persist through to the end of 2010.

Savills said today that its forecast that house prices will fall by 25 per cent over this year and next was looking like an increasingly safe bet.

The extent of the problems in the housing market was underlined further by forecasts that up to 1.3 million British homeowners could find themselves in negative equity, when mortgage debt is higher than the house's value, if prices fall and the economy moves into recession.

If true, the prediction, made by leading banking analysts, would mean that more than 10 per cent of the nation's homeowners would be sitting on properties worth less than they paid for them.

"Our estimate is for 25 per cent to 35 per cent house price falls from their height...resulting in up to 1.3 million households, or 18 per cent of mortgages by value, in negative equity under our recession scenario," said Bruno Paulson, senior analyst at Sanford Bernstein, the research group.

Mr Paulson said that house price falls would be "far worse" than in the last economic downturn in the 1990s and could have a huge negative knock-on effect for the UK's mortgage lenders.

"This should in turn drive 1 per cent peak losses on mortgage books in a serious recession, and an overall mortgage loss bill [for banks] of up to £38 billion," he said.

This week, the Organisation for Economic Co-operation and Development (OECD), an influential think-tank, said that the UK would fall into recession in the second half of the year, marking out Britain as the only country of the G7 economies that will experience a full-blown slowdown in 2008.

Sanford Bernstein gave its forecast after fresh evidence emerged earlier this week that house prices were sliding at double-digit levels year-on-year.

Halifax, the country’s biggest mortgage lender, said this week that property prices fell at an annualised 12.7 per cent last month, just days after its rival Nationwide Building Society revealed an annual decline in property prices of 10.5 per cent.

Times Recommends

• Equitable Life halts £7bn sale on market turmoil
• Potential buyers emerge to save Woolworths staff
• Terrorist attacks close Bombay Stock Exchange