The rapid increase in house prices during the 10 year upswing means only 0.6% are currently in negative equity. But in recent months house prices have been falling at the sharpest rate on record and S&P said that for every further percentage point fall in the cost of property, 0.5%-1.5% of borrowers could be in negative equity.
S&P state that by 2009 14% of owners may be in negative equity.
Liberal Democrat Treasury spokesman Vince Cable said: "When I warned of this degree of negative equity a few months ago I was accused of excessive scaremongering. But the idea of nearly two million homeowners facing negative equity is now regarded as mainstream by many experts."
A return to the negative equity levels of the early 1990s would put additional pressure on the government to help homeowners.
S&P said borrowers in the buy-to-let and sub-prime sectors were most at risk from negative equity. "A further 17% decline in house prices could put around 24% of non-conforming borrowers into negative equity, compared with only 13% of prime borrowers."
The predictions by S&P came as the British Bankers' Association (BBA) published statistics suggesting that the industry was not returning to the record level of repossessions of 1992, when 75,500 homes were taken back by lenders.
The statistics showed that 27,000 homes were repossessed last year and the predications suggest that this could reach 45,000 by the end of this year. This represents 12 out of 10,000 properties with an outstanding mortgage.
