Australian Property Updates

Property Information & Real Estate Updates

Negative equity is a reality for many home owners

Many property owners continued to increase their home loans on the assumption that property values will continue to increase. Today, some buyers are finding that their homes are worth less than the amount they owe to their lender on their home loans.

While today only 2% of home owners are faced with the reality of negative equity, if property prices continue to decline into the 2012 this problem may become more widespread.

The emergence of a sector of the housing market ‘‘under water’’ on their mortgages may hurt an already fragile real estate market. Any forced sales would create a spate of bankruptcies with borrowers owing significant amounts to their lenders, amounts they will not be able to repay.

Ben Phillips, principal research fellow at the National Centre for Social and Economic Modelling, helped prepare the analysis which pointed to 60,000 households nationwide with negative equity.

Certainly, Australian households have fared better than most countries in coping with living costs even with housing affordability hovering near historic lows.

However majority of experts believe that this is not the end and that 2012 will bring with it a spate of flat property prices and [possibly further declines.

Ability to borrow as much as 95% for the purpose of a home loan was a significant contributor to this problem.

Macquarie senior economist Brian Redican said negative equity has been a rare feature of the Australian property market until recently.

“High loan to valuation ratio have been quite uncommon until the last 10-15 years,” Mr Redican said, citing the standard LVR measure used to assess homeowners’ exposure to debt. Previously it was pretty much the norm that a purchase would contribute 20% or more towards the property price as a deposit and home loans mostly did not go beyond 80%.

The negative equity estimates here are derived from the share of borrower households with an LVR of 100 per cent or more, compared with this year’s home price falls, in an analysis of Australian Bureau of Statistics and RP Data by the NATSEM.

LVRs have swelled in the past two decades as lending rules were relaxed, permitting banks to extend a higher percentage of the value of the home. Buyers, armed with more funds, then bid up home prices to levels that international observers, such as The Economist, say are among the highest in the world.

Experts are not expecting that negative equity will become as big a problem in Australia as it was some years ago overseas, however it will prevent many people from doing anything as far as buying, selling or renovating.