Up to 1.7 million homeowners are in danger of plunging head first into the black hole of negative equity if house prices continue to fall, a report has warned.

About 70,000 people already owe more on their mortgage than their property is worth as a result of the current downturn, according to credit rating agency Standard & Poor's.

But it warned that 1.7 million people, the equivalent of 14% of all mortgage holders, could find themselves in the same situation if house prices fall by a further 17%.

The group said people in the buy-to-let and sub-prime sectors were particularly vulnerable, with nearly one in four sub-prime borrowers likely to end up owing more on their mortgage than their home was worth if house prices dropped by 17%.

It said that for every 1% drop in house prices, a further 60,000 to 180,000 of all homeowners with mortgages would go into negative equity.

Credit analyst Andrew South said: "The downward trend in UK house prices now seems well established, and we expect prices to continue falling in the near term.

"In a separate article, our economists forecast a further drop of around 17% before prices flatten off in 2009."

The group, which based its research on analysis of a sample of two million outstanding mortgages, said the average homeowner had a loan to value ratio (LTV) of 54%.

Just over 80% of mortgages have LTVs of less than 80%, although a "modest fraction" of borrowers owe a higher proportion of their home's value, it said.

Borrowers in the buy-to-let and sub-prime sectors typically have higher LTVs averaging around 70%.

The group said falling house prices increased people's LTVs, raising the risk of borrowers defaulting on their loans.

It said if homeowners found themselves in financial difficulties, borrowers with moderate LTVs had some flexibility, and may be able to refinance their mortgage to reduce their monthly repayments, or in the worst case they could sell their home to refinance their debt.

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