Powered by momentummedia
nestegg logo
Powered by momentummedia
nestegg logo
nestegg logo

Invest

Negative equity: Is your portfolio at risk?

By Cameron Micallef · May 17 2019
Reading:
egg
egg
egg
Property

Negative equity: Is your portfolio at risk?

author image
By Cameron Micallef · May 17 2019
Reading:
egg
egg
egg
Property

With the housing market in freefall, many Australian home owners are now in the unfavourable position of negative equity.

What does negative equity mean?

Negative equity occurs when the value of real estate property falls below the outstanding balance on the mortgaged used to purchase the property. It is calculated by taking the current market value and subtracting the mortgage.

It leaves home owners in the unfavourable position of not being able to sell, or selling an asset and still being in the red.

How widespread is the problem?

Advertisement
Advertisement

The RBA suggests that the problem is mainly in Australia’s north and west, where mining has played an important role in the local economy.

Following the mining boom in Western Australia, almost 60 per cent of loans are in negative equity, with similar data coming out of the Northern Territory, the Reserve Bank of Australia (RBA) said in it’s April reporting.

While officially the number is 2.75 per cent of mortgages being in a state of negative equity, the RBA states that some private surveys estimate the figures to be closer to 10 per cent of mortgage holders in Australia.

Investors should note that these surveys are likely to overestimate for a number of reasons, including not accounting for offset account imbalances.

The impact on Sydney and Melbourne

Sydney and Melbourne housing prices are expected to decrease further in the current year. With this, the RBA warns that negative equity could increase in Australia’s two largest cities.

The RBA suggests that around 1.25 per cent of loans by numbers or 1.75 per cent by value are likely to move into negative equity if there are further housing falls.

Global comparison

Compared to the international experience with negative equity, the RBA suggests the incidence of negative equity is likely to remain low.

The peak of the GFC in 2012 saw over 25 per cent of properties in the United States move into negative equity. In Ireland, the numbers reached 35 per cent, as trough prices falls exceeded 30 and 50 per cent, respectively.

Even if negative equity becomes more common in the larger housing markets of Sydney and Melbourne, the impairment rates for banks are unlikely to increase significantly while interest rates remain low and employment remains high.

Negative equity: Is your portfolio at risk?
Property
nestegg logo

Forward this article to a friend. Follow us on Linkedin. Join us on Facebook. Find us on Twitter for the latest updates
Rate the article
author image

About the author

Cameron is a journalist for Momentum Media's Nestegg. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leveraging their insights to grow your portfolio.

Join The Nest Egg community

We Translate Complicated Financial Jargon Into Easy-To-Understand Information For Australians

Your email address will be shared with nestegg and subject to our Privacy Policy

About the author

Cameron is a journalist for Momentum Media's Nestegg. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leveraging their insights to grow your portfolio.

Join The Nest Egg community

We Translate Complicated Financial Jargon Into Easy-To-Understand Information For Australians

Your email address will be shared with nestegg and subject to our Privacy Policy

From the web

Recommended by Spike Native Network

Website Notifications

Get notifications in real-time for staying up to date with content that matters to you.

Copyright © 2019 MOMENTUM MEDIA