House prices will fall by 15 per cent in the next two years, pushing one in ten homeowners into negative equity, a leading investment bank has forecast.

Morgan Stanley predicts that 1.2 million people will be in negative equity, owing more money on their mortgage than their home is worth — levels not seen since the early 1990s.

Those affected cannot move house easily unless they raise finance elsewhere to pay off their home loan. They must either stay put and pay their mortgage bills, or sell at a loss.

First-time owners will be particularly badly affected. Five per cent took out a loan of 100 per cent or more of the purchase price of a property last year. Morgan Stanley also suggests that if house prices fall by 25 per cent over the next two years, more than two million — or a quarter of all borrowers — would be in negative equity.

The report’s authors, including David Miles, who has written a Treasury-backed report on mortgages, even gave warning that their figures may be too conservative as they did not include mortgages taken out this year.

The Bank of England’s chief economist also sounded a warning to homeowners that house prices were likely to remain exposed to further falls in coming months. Charles Bean dampened hopes that the Bank would help to bolster the property market with further cuts in interest rates, saying that it was still “walking a tightrope” between threats to economic growth and dangers from inflation.

Highlighting the vulnerability of house prices to fresh falls, Professor Bean said that a continued short supply of new home loans was likely to keep the economy’s activity subdued and “put further downward pressure on house prices relative to earnings”.

He challenged claims that a housing slump will undercut consumer spending, saying the slowdown so far had been “relatively modest”. He said the toll would be offset by a 12 per cent fall in the pound — roughly equivalent to a 3 percentage point cut in base rates.