There are thousands of properties across Sydney worth less than their purchase price given property values have dropped nearly 13 per cent since the July 2017 peak.
Buyers who bought then for A$1 million, would now have a home worth A$870,000.
Values rose by around 75 per cent in the five years from 2012, but research suggests values have reverted back to mid-2016 levels.
CoreLogic has further calculated almost 270,000 Sydney properties would lose money if they happened to sell now.
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Of course, the current sale price depends on many factors, not just the time of purchase and the overall market price trend. It may be that the property was bought very well. It may be that the suburb has done better than most in withstanding the downturn.
It is not just the directly impacted 270,000 who are feeling their falling household net worth. All of Sydney is. Just how that feeling reverberates through the economy is being closely watched by economists, surplus- seeking governments and the Reserve Bank of Australia.
Feeling less wealthy could affect the economy as cautious households boost savings and reduce their spending, which potentially triggers increased unemployment, and then a nasty economic spiral.
The Reserve Bank of Australia once calculated a 10 per cent increase in housing wealth raised consumption by 1.5 per cent. And some economists believe the wealth decline effect could be twice as much in impact as gains.
Owing more on the house than it is worth is known as negative equity. Selling the house for a loss is the worst of possible outcomes, but these will likely be limited to a few recent buyers whose loan-to-valuation ratios sat above 90 per cent, and whose personal circumstances have changed. Their selling could mean having to write a cheque to the bank, and then not having the deposit for another property.
However negative equity will make many more homeowners a prisoner in their existing property. The American National Bureau of Economic Research suggested that negative equity reduced household mobility by 30 per cent, as owners are understandably unwilling to crystallise losses. Most recent Sydney owners will never really know if they are in negative equity, but recent interest-only mortgage borrowers are more at risk since their loan repayments have been at a lower rate.
When a borrower’s initial interest-only period is over, clients automatically rollover to a principle and interest (P and I) loan on the variable rate, Sam White, the executive chairman at Loan Market advises. “Very rarely will this trigger a valuation,” he said.
White adds when the borrower was first assessed, they would have been assessed on their P and I capacity.
“They would also have been assessed at a rate higher than the actual interest rate, so as long as nothing has changed with their circumstances, they should be able to make those repayments.’’
Mortgage brokers are aware of their client’s pending reset, with White saying at that stage his brokers work with clients to ensure a smooth transition.
His recommendation is that before the borrower deals with the bank they should talk to their broker to understand what their options are.
- news.com.au
