SOME 40,000 first-time buyers who bought properties with 100 per cent no deposit mortgages will be facing an average paper loss of €18,200 each, if house prices fall 10 per cent this year, according to research by Davy Stockbrokers.

Davy has said in its weekly market comment report that a 10 per cent fall in house prices would lead to negative equity – where a mortgage is higher than the value of a property – to the value of €728 million, or 0.5 per cent of residential mortgages.

The firm is forecasting a 12 per cent drop in house prices this year, but said first-time buyer house prices were falling at a faster rate.

A 10 per cent fall in house prices would leave 40,000 first-time buyers in negative equity by the end of this year, Davy said.

During the housing peak in 2006, 36 per cent of mortgages to first-time buyers were 100 per cent home loans, while 69 per cent had a loan-to-value (LTV) ratio of more than 90 per cent.

Davy said a fall in house prices ranging from 5 to 15 per cent would leave between 22,000 and 55,000 first-time buyers in negative equity.

Stephen Lyons, analyst at Davy, said falling house prices and rising negative equity had personal rather than financial consequences. “If a person’s job is lost, that would be a big concern but unemployment is not on the same par as in the UK in the early 1990s when there was negative equity.”

He said first-time buyers might change their plans to sell so as to avoid making a loss. “I don’t think anyone will want to realise the loss. I think people will sit and hold on to their property, and hope that the capital appreciation will come back so those who had intended to stay in a property for three to four years will probably stay for longer,” he said.

He said first-time buyers were likely to reduce their expenditure and that there were no signs of distress in prime mortgages to date.

Lenders have cut back on 100 per cent mortgages, with only a few lenders providing them to people with guaranteed earnings.