A number of homeowners are likely to enter into negative equity, it has been warned.
The Financial Services Authority (FSA) believes that if property prices fall 30 per cent from their peak, then around two million homeowners will find themselves in negative equity.
"According to Council of Mortgage Lender estimates, around one-quarter of possessions during the early 1990s recession was the result of borrowers voluntarily handing back their keys. This behaviour is more likely if people are in negative equity," the FSA’s financial outlook report for 2009 states.
It believes the decrease in house prices will also hit 500,000 buy-to-let investors, who will also enter negative equity as a result.
Furthermore, the body reveals that mortgage arrears and repossessions are "significant", with the figures increasing due to problems in the wider economic market.
Last month, the CML revealed there were 40,000 repossessions in 2009 – equating to around one in 290 mortgages.
It forecasts there will be 75,000 repossessions this year, a figure which remains unchanged in light of the recently released statistics.