Up to 10% of Kiwi mortgage-holders could fall into negative equity if house prices drop dramatically, according to a recent warning by the Reserve Bank.
That “worst-case scenario” could see those affected owing more to the bank than their property is worth.
In its May Financial Stability report, the RBNZ noted that a 30% fall in house prices could lead to around 10% of all outstanding mortgage debt falling into negative equity, although it does add that “given the large increase in prices over the past two years, it would take a substantial decline in prices to see widespread negative equity”.
The major retail banks are predicting possible falls of up to 20% in residential property prices over the next year, and while that would be their biggest drop since the 1970s, it would still only take prices back to where they were at the start of last year.
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Drops in house prices coupled with rises in mortgage interest rates and spikes in the cost of living could leave some new home owners unable to pay the mortgage.
ASB economists warned that "the bulk of the house price impact from the mortgage rate surge is yet to come. About 60% of all mortgages rates will be reset over the coming 12 months."
That means many homeowners will be paying much higher interest rates than they had been used to.
While some homeowners may react with panic to forecasts of house price drops, those who bought prior to the pandemic or even in 2020 would still be sitting on large capital gains, says mortgage broker Geoff Bawden, of Bawden Consulting. However, those who bought in 2021, at market peak, may feel differently.
A “worst-case scenario” always depends on who you are, says Graham Squires, professor of property studies at Massey University and director of the Property Knowledge. If you’re a first home buyer, falling prices may be of benefit. Likewise the owner of one property might have a very different worst-case scenario to an investor with 15 properties, he says.
“If the benchmark is pre-pandemic, two years ago, everything doesn't look worrisome.”
However, negative equity will be the reality for a growing number of Kiwis this year as property prices continue to drop. iLender mortgage broker Jeff Royle says the UK experience of negative equity in the early 1990s, when large numbers of homeowners had to hand their keys to the bank, is unlikely to happen in New Zealand.
Professor Graham Squires says Kiwis may have forgotten that house prices can go down as well as up. Photo / Supplied
The UK property market fell 12.5% in the early 1990s, and by mid to late 1993 , 26% of all homeowners who had bought between 1988 and 1991 had negative equity in their properties, and were paying high interest rates at the same time.
Those homeowners most at risk of negative equity in New Zealand are the ones who bought in 2021 on low deposits of 10% or less. Most of those who bought at the height of the market last year will simply pay the mortgage and hold on, say Royle and Bawden.
Bawden adds that buyers who sell at a loss will be buying at the same reduced prices. And those who have negative equity will need to get permission from the bank to sell if they can’t repay the mortgage from the sale proceeds.
The double whammy of rising mortgage rates and prices for goods and services could, however, push some over the edge.
Squires says some people may have forgotten in the frenzy of the past few years that property prices can go down as well as up.
They need to look at the equation over the entire lifetime of a mortgage. Falling prices for a period aren’t all doom and gloom, he says. “If you look at the big long term picture [of the property cycle], it will go up and down in the short term, but over the longer term, we see that rise as it goes up.”
