Property expert Matthew Hughes outlines the steps buyers can take to avoid negative equity and what to do if you find yourself in the negative equity trap.
A recent report has highlighted that 386,000 mortgage holders have no real equity in their homes. To understand why, we need to explore our various capital city markets individually.
Timing the market is a term that is widely used in property circles, but not always widely adhered to. As it relates to Sydney and Melbourne, we would expect the proportion of mortgage holders who entered the market towards its recent peak to enter into negative equity territory in the coming 1 to 2 years as prices continue to slide.
Sydney and Melbourne are the predominant factors in a national median price slide with Sydney falling 6.1% in the last 12 months, followed by Melbourne with a more moderate 3.4% decline over the same period. Both are expected to continue in this direction as prices correct themselves following years of above average growth. Despite what some sensationalist media reports may tell you, very few economists or industry experts are predicting much more than a correction; however, this market change is likely to cause some mortgage stress for those who thought the good times would continue forever and did not plan for the impending falling prices and rents.
On the other side of the country dwelling values in Perth remain 13% lower than their 2014 peak, contributing to the zero or negative equity position being experienced by a nation leading 16.5% of mortgage holders.
This higher figure is a result of a falling median price in Perth but it is important to remember that the median represents the middle, and many of the 16.5% have likely experienced a greater fall in values than this.
There are many factors that have contributed to this underperformance; however, two main reasons stand out.
- Buyers have acquired a new home or investment in a new suburb in a fringe area of Perth – an area where supply outstrips demand, and likely will for some time.
- They have bought from a “property spruiker” – an unscrupulous sales person who has hidden a hefty commission in the purchase price, meaning the often highly leveraged buyer is starting from a position of negative equity before they even get a chance to experience a market decline.
The potential for a rise in interest rates or further tightening of lending policies will likely contribute to this issue getting worse before it gets better.
So what do you do, if you are part of the 16.5%?
If you are one of the home owners in this position, it is important to remember that time in the market is almost as important as timing the market – so take a long term view.
Before making any decision on what to do, it is important to gain some insight into the future potential of your asset.
If you bought an established (older) property it may pay to make enquiries with a professional as to whether there are methods you can employ to manufacture some equity. Executed well, you may be able to add value via renovation, subdivision or both.
If you are in an established suburb with little scope for further supply (of new houses) coming to market, then it would likely be wise to wait for the impending Perth market recovery. However, if you are in a new suburb on the fringes of Perth you may require considerably more patience, as the supply in these areas will take many years to be absorbed by the market and any semblance of growth may be many years from now.
Anyone considering entering the market in the near future would be wise to seek the help of a fee-for-service, independent adviser to ensure they make sound choices on what is for most people, the largest investment decision you will make in your lifetime.
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