Powered by MOMENTUM MEDIA

Website Notifications

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

Negative equity: Is your portfolio at risk?

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.

Advertisement
Advertisement

How widespread is the problem?

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
subscribe to our newsletter sign up
FROM THE WEB
Recommended by Spike Native Network
The Patriot - It seems madness to lower interest rates when we know that we will need room to drop later as the economy slows on back of China slowing. If wages do.......
Anonymous - Does the RBA think?....
Anonymous - Bloody mad. Much cheaper and better and more fun to learn to cook for yourself. And, if you are time pressed, a crockpot set up the night before and.......
Anonymous - The RBA seems to think more expensive land is prosperity. Not for the landless!....