Negative equity doesn’t mean mortgage stress

Negative equity doesn’t mean mortgage stress

Posted on Thursday, October 18 2012 at 4:40 PM

Splashed across mainstream news headlines this week were claims of negative equity scenarios occurring across more than one-third of Australian properties purchased since 2008, however what was missing from the panic headlines were that the majority of those facing negative equity were first homebuyers who bought post-2008, rather than investors and other owner-occupiers.

This differential means that
first homebuyers are the ones being challenged to refinance or borrow further
to renovate as a result of the stagnant capital growth and limited or even zero
equity accrued in the timeframe since 2008, according to the J.P. Morgan
Australian Mortgage Industry Report Volume 16
released earlier this

However what it doesn’t mean is
that recent first homebuyers are under mortgage stress or that they need to
panic, particularly as interest rates decline, says Australian Property
Monitors senior economist Andrew Wilson.

Wilson provides a clear context
of the situation, enough to wield away those panic button pushers just pulling
the figures and placing them into big headlines.

“It’s an interesting theoretical
model (number of negative equity mortgagees) that gathers attention but it’s
not a real position unless it’s a forced sale or someone wants to access
equity,” Wilson says.

He adds that forced sales only
occur in times of major job losses. “And while there are some signs that our
employment growth has dropped a little, it’s still strong.

“The real picture is in looking
at the equity position over eight years, because six to eight years is the
average for property turnover in Australia.”

As the market peaks and troughs
and carries on with growth again, many buyers are bound to find themselves in a
paper position of negative equity if they’ve just bought the property on a high
loan-to-value ratio at a peak in the market, adds Wilson. “It depends when you
choose to take that snapshot though.”

Someone who bought between June
2010 and today across most capital cities in Australia won’t have seen much
growth, if any, Wilson says.

“But any negative equity will
switch to positive equity over time, particularly when historically Australian
property sees 10 per cent plus capital growth per annum over the long term.”

It’s also important to note that
first homebuyers most likely in a negative equity or zero equity position
bought property with government incentives post-2008 at propped-up prices, at
high loan-to-value ratios, yet also with the least amount of risk exposure to
the property market compared to investors and other owner-occupiers.

As referenced in the report
released Tuesday, RP Data states: “Value accumulation is not just a fluctuation
of market conditions but also the length of time a home is owned for. With a
short length of ownership there has been a shorter period of time to accumulate
value, however the fact that value accumulation levels are so low on those
homes purchased after 2008 also highlights just how subdued the housing market
conditions have been since 2008”.

In the same report, some
interesting comments from J.P. Morgan reveal that investor loan demand is
actually “holding ground” and the overall value of repayments, particularly
from owner-occupiers, have actually “accelerated”.

The mortgage industry report
also states that the typical response for why investor loan demand has held its
ground is because of the investor’s preference to move away from equity markets
given the current volatility and the “continued growth in rents against
declining interest rates”.

J.P. Morgan suggests that the
key driver of the steady finance demand from investors compared to
owner-occupiers relates to the repayment profile of the loan, for example the
popular interest-only loan and the tax-deductible benefits allowable.

APM’s Wilson says the media
likes to jump on the fear factor bandwagon from time to time, however he
believes the general conversation about the bubble bursting has recently
switched to chatter about the bubble becoming inflated again, a sign that
recovery is under way.

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