First home buyers may be rejoicing at falling house price forecasts of up to 25 per cent in some cities, but for others it’s terrible news.
People already repaying mortgages can face negative equity — when what they owe is more than the value of their property.
Mozo property expert Steven Jovcevski said the best strategy for those facing negative equity was to wait out the price downturn if they could still make mortgage repayments.
“Negative equity is something fairly new. We saw it in Western Australia’s mining towns recently when some houses halved in value overnight,’’ Mr Jovcevski said.
Roy Morgan research in late 2018 showed a rise in the number of Australian borrowers with little or no equity in their homes, at 386,000 households up from 345,000 households a year previously.
Median house prices have fallen in Sydney, Melbourne, Perth and Darwin in the past year while Hobart, Canberra and Adelaide have seen rises. Brisbane prices have been relatively stable.
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“The aim of the game is keep the property if you can and ride it out because you only make a loss if you sell,’’ Mr Jovcevski said.
“This is the cycle of property, if you’re in it for the long term. Property is a long-term investment you should not be looking at it in the short term for a quick buck.’’
However there may be reasons to sell in which case it is time to speak to a financial adviser or your bank, Mr Jovcevski said.
“If you’re not confident it’s going to go any higher, and possibly go lower, then if you can sell, break even and get out, that’s a positive,’’ he said.
“If you sold a house and still owe the bank, say, $50,000, then I’d suggest talking to a financial adviser. If you do get into that situation and have to sell, then talk to the bank because they have hardship programs and see what they can offer you.”
Other strategies include paying extra into the mortgage to reduce the negative equity, adding value with a renovation as long as you stick to a budget, or earning extra income by renting a room on Airbnb.
AMP Capital chief economist Shane Oliver said recent cues from the Reserve Bank Australia pointed to a possible interest rate cut from mid-year to provide some relief for people facing negative equity.
Banks would be under enormous public pressure to follow an RBA rate cut, which would mean a saving of up to $2000 a year saving if banks cut by 0.25 per cent for borrowers with an average $400,000 loan on variable rate mortgage.
“That goes a long way to offsetting a fall in wealth,’’ Dr Oliver said.
He said the 2017 price peak of Sydney and Melbourne housing markets coincided with a series of tighter lending measures from banks — first with speed limits on investor loans from 2015, similar limits to interest-only loans from March 2017, and tightening lending standards based on borrowers’ income and expenses from late 2017.
Originally published as How to deal with negative equity in your home