Did you get a chance to read the article in the Financial Review on 26 October 2018 titled ‘More than 350,000 households at risk of negative equity’?
It’s a very enlightening article especially for first home buyers purchasing property on the fringes of capital cities. This is where most house and land packages are being sold to first home buyers and due to the lack of infrastructure and excessive amounts of land available, the predictions for these areas being hit the hardest will probably come true – sorry to say!
This prediction is supported by Martin North, principal of Digital Finance Analytics (DFA), who predicts that “The trajectory is down” and believes it’s a “question of how fast and far”.
If the predictions are true, and there is a 20 per cent fall in house prices, then there will be hundreds of thousands of households in a negative equity position.
Negative equity is when the value of the property drops to less than the value of the mortgage.
The Financial Review article goes on to explain that this phenomenon is not exclusively a first home buyers problem.
According to their analysis, the fall out of this will engulf not only the outer suburbs but “inner suburbs of Melbourne and Brisbane where streets have been transformed by medium-density apartments and high-rise blocks would experience more households in the red”.
What about Sydney’s apartment market then?
Sydney’s apartment market doesn’t get a mention in the article yet there are more apartment blocks in Sydney than any other capital. However the article does go on to say that “90 per cent of houses in some suburbs of Western Australia and outer Sydney will face a negative equity situation”, which means, if you are under financial stress you won’t be able to sell your house because you will owe the bank more than the property is worth.
The Financial Review writes and then quotes Martin North to saying…
The immediate danger is for property borrowers wanting to refinance their loans to trade up, or down, to take advantage of falling prices, low rates and lucrative incentives.
“People who bought in the last few years might find they don’t have the equity in their property to find another loan. They could become a prisoner to their existing lender,”
Now excuse me for stating the obvious but hasn’t the property market been booming over the last few years, with house and unit prices increasing by 20-40% or more in some cases, I know the value of my properties have gone up considerably so why would people (even first home buyers) not have equity in their homes?
Many of my students who purchased property a few years ago are ecstatic with the amount of equity that has been generated over this boom period and with it the opportunity to be able to purchase more investment properties using this additional equity.
But wait, in the same article, it goes on to say…
“Lenders are also chasing borrowers with regular income that comfortably cover expenses and deposits of 20 per cent or more …”
And then finally… and I quote…
“cashed-up investors… who have been squeezed out of the market … are returning as prices fall and sellers become more willing to negotiate”.
One minute they are saying it’s going to be difficult to refinance which will result in people being ‘trapped’ with one lender and in the next moment, that the banks are looking for buyers to lend money to especially those who have deposits of 20 per cent or more and regular income.
I thought that this applies to most Australian’s who receive a regular income especially those in full time employment. And don’t we all know that you need to have a deposit to be able to purchase a property anyway? In order to obtain a loan from any lender, don’t we also need to prove that we can afford all the expenses relating to the property?
Confused?… yep! This is why I get frustrated from written articles in the media as sometimes it’s difficult for the layman to figure out what’s going on.
So what is this article saying you should be doing?
If the articles predictions turn out to be correct, it means that now is still the right time to be buying however you will need to work hard at negotiating the purchase price down on any property you are looking to buy. This will then lower the risk of going into a negative equity situation should prices continue to fall.
That is, make sure that you get the biggest discount you possibly can, or walk away from the deal, for example, I’d been wanting at least a 20 per cent discount on the asking price and if you get it will help to safeguard you from ending up in a potential negative equity situation.
History shows that downturns typically last for 18 months to two years, so make sure you can comfortably hold on to the property for that period… so that you don’t end up in a financially stressful situation. After all, if you don’t sell, you won’t have lost anything.
So… Where to from here?
Economists across the country have all been predicting a property downturn, but no one really knows by how much or how long it will last, history suggests 18 months to two years. The warning however is that property prices will fall especially as buyers continue to get nervous about the market and the media continues the feast or famine frenzy.
Then when you add into the mix the possibility of the Labor Party getting into government and removing negative gearing and capital gains tax benefits, then it’s not surprising that the market is reacting in the way that it is.
My 20 years in the property market, has taught me that when the media makes enough noise, and changes or predictions of policy change are tweeted and/or talked about and the banks are seen to be ‘getting nervous’, then there will most likely be a downturn.
What fascinates me is that we are continuing to experience some of the lowest interest rates on record, unemployment is on the decline (which is great), the economy is stable, and immigration is high. As a country, but we are not producing enough houses for our burgeoning population. We currently have shortfall of 40,000 from what we actually need so with so many people scared off …
Can you guess what is going to happen?
I’ve been talking about it all year and my prediction is that we are going to experience a RENTAL BOOM like no other.
In fact, my students and I are already experience our rents going up by $40-$50 per week due to the short supply of quality rentals.
So if you are an existing property investor, you need to be talking to your property manager to review your rents. The tide has turned and its gone from a tenants market to a landlords market.
I teach my students to look after their properties, don’t penny pinch on tenants needs and wants and take care of them as they are the ones who are supporting your long-term wealth creation strategy.
I would really like to hear your thoughts on this and what you think of the Financial Review article stating that hundreds of thousands of homes are at risk of negative equity. I invite you to comment below and share your thoughts.