Homeowners who bought in the closing months of 2021, at the height of the market, are at risk of falling into negative equity, as house prices continue to tumble.
The latest figures from the Real Estate Institute of New Zealand show the nationwide median sale price has dropped 13% ($120,000) since peaking at $920,000 in November last year.
Some regions have been hit harder, though. Wellington’s median sale price has dropped 22% ($220,000) from a peak of $1 million in October last year, while Auckland’s median sale price has fallen 15.38% ($200,000) from a peak of $1.3m in November.
The slide in prices means new homeowners in many parts of the country could find themselves owing the bank more than what their home is worth.
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And while negative equity isn’t a risk to those who don’t plan to sell any time soon and can continue to make repayments on their mortgage, it can be a financial millstone to those who do need to sell in the current market environment.
Aseem Agarwal, head of mortgages at Global Finance, said his company recently dealt with a homeowner who was struggling to service their mortgage after rising interest rates pushed their monthly repayments from $5000 to $7000.
The homeowner, who was feeling the squeeze after coming off a one-year fixed rate, had wanted to extend their mortgage term from 25 to 29 years, which would have lowered their monthly repayments to a more affordable level, but because the property had fallen in value and was now in negative equity, the bank refused make the changes.
“[The homeowner] took the loan for their first home at 90% over a loan term of 25 years last year. Their outstanding balance was more than their current house value,” Agarwal said.
“They were very disappointed to apply for the financial hardship on their mortgage repayment after the first year of their mortgage with the bank.”
Agarwal says many first-home owners who bought at the peak of the market last year were now facing the stark reality of increased mortgage repayments.
Investors, too, are also coming under pressure.
Mortgage adviser Geoff Bawden, of Bawden Consulting, said he was seeing a steady trickle of clients who had bought second homes during the market frenzy last year and were now facing financial hardship as a result of the market slump.
He cited as an example a homeowner who was looking to move from Auckland to Queenstown, but was prevented from doing so because their rental investment had fallen in value.
“The bank has a hold over both the investment property and the owner-occupied property,” Bawden said. “If they sell the owner-occupied property [to move to Queenstown], the debt on the investment property is more than 60% [the maximum allowed under the LVR rules]. Therefore the bank isn’t letting the homeowners sell their own home.”
The client wanted the bank to use some of the equity from their home sale to reduce the debt on the rental property, but it refused. “This particular bank doesn’t have a good history of agreeing to that.”
The owners are well within LVR rules overall for the two properties combined. “But the only option seems to be to refinance both properties to another lender,” Bawden said.
He said another client who owns a second home by the beach was having difficulty getting a top-up loan for renovation work because the property is in negative equity. “The bank is insisting on progress payments and registered valuations and all sorts of things. And the client’s going ‘I’m just not doing that’.“
Mortgage adviser Sue Mihakis-Tierney told OneRoof she had a panicked call from a client recently. "They sold their home, and took the 10% deposit paid by the purchaser and used it to pay off credit cards and other debts after paying real estate fees instead of paying down their mortgage. When it came time to settle they didn't have enough money from the sale to release their home because the remaining security was a rental and too highly geared. The rental had dropped in value and had too much debt on it. They had to borrow from friends and second tier lender to pay down sufficient debt for the bank to release the security to the new purchaser."
While the housing market slump has pushed many homeowners into negative equity, and rising interest rates and a cost of living crisis have made it harder to service mortgage debts, mortgage advisers haven’t seen any indications that there will be an uptick in forced sales.
Simply being under the minimum LVR thanks to falling prices would never be a trigger for a mortgagee sale, said Campbell Hastie, mortgage adviser at Hastie Mortgages.
Mortgagee sales only occur when the mortgage-holder stops paying the mortgage, and even then, banks are required to offer payment arrangements.
Banks will only start taking steps towards mortgagee sale if a homeowner continues to miss payments and fails to communicate. “People sometimes panic, and don’t make informed choices because they hadn’t been given them,” Bawden said, adding that those affected often struggle psychologically with what is going on, and struggle to take action such as seeking help from a mortgage adviser.
