We all know that bad news sells, while good news does not.

At the moment, in the media, there is a lot of loud noise around about house prices plummeting, the housing crash and some homeowners finding themselves in negative equity positions. This does not help consumer confidence and in turn has a negative effect on our first home buyers.  

Or, to put it more plainly, it freaks people out. They start to wonder…  

What does it mean if I brought a house at the market peak, and the market crashes? What is negative equity? Do I owe more than I own …. Is the Bank coming for me… Will I be on the street??

You can just about smell the fear in this media-spun environment, and it is no wonder that people are hesitating to dip their toe into the property game.  

Negative Equity can turn into blood in the dancefloor, in certain situations, yes. But most of the time it means nothing much at all.

Keep reading....

So, what is negative equity, and when does it actually matter?

Negative Equity (related to property) is the term used to describe the phenomena when the market value of a property falls below the value of the debt “mortgage.”  

e.g. You paid $1,500,000 for your house. The market dips and now if you sold it, you can only sell it for $1,350,000. And if did do that, you still owe the bank $150k. Yep, that hurts.

Negative Equity is also sometimes referred to as being “upside down” on a property or a deal.  Thankfully it does sounds cool when you use it in a sentence, which helps alleviate the pain, if you find yourself “upside down.” Not as cool (but still a little cool) is using the term “underwater” to explain your negative equity situation.  

e.g. F???? I’m “underwater” on my Palmerston North property!  

(Why you invested in Palmy is a whole other discussion… Let’s talk about that another time.)  

What does it mean then?

So, are there people in New Zealand in this position today…. Yes.

Will the Bank make them sell ….. Nope.

Do they need to keep paying their mortgage …. Yep.  

Is this a situation to worry about….. Depends.

The impact of negative equity depends on why you brought the house in the first place.  

If you purchased your house as your owner-occupied home and you are planning to stay in, it then keep on paying your mortgage. The market cycle will turn again (as it is already doing) and because time is our friend, you will be fine. You bought the house to live in, so keep on keeping on, and things will iron themselves out eventually. That’s the way the market works.

From the Banks’ perspective, they know which properties are in a negative position. As long as the mortgage is paid, things are okay.  You will not be able to borrow anymore as there is no equity to use, but you will not be out on the street. So, keep on paying, don’t read the paper or listen to the news. Only read the Velocity Spin newsletter and you will be fine.

If you brought the house to turn a quick profit (flipping), then you may be caught short.  This is what professionals know. You win some, you lose some.  This is the risk and why our advice is to think in five-year term minimums with investment property unless you really know the market and can also cope with losing some on a sale.  

Has this happened before … sure has. The GFC absolutely brought this home (mortgage-related pun right there) to many that had speculated on property particularly in the spec-build Auckland apartment market. There was lots of blood on the dance floor around 2009 (not a reference to the Michael Jackson Song).  

What about having to sell because of a divorce/separation/ business trouble etc.  Then we are talking potential blood on the dancefloor, and we are having a different conversation. However, you only realise the loss or the pain when the house(s) are sold. So, my question here would be, do you really have to sell at this time?  Are there other ways and means to see you through until the market shifts again? This is most definitely the time to get some very good advice around how to manage your way through this difficult period. My strong advice is to start with your adviser if you are in this situation.  

‍

Graham.

Graham Goodisson (FSP95428) is a Financial Adviser with Velocity Financial (FSP95466). No investment decision should be taken based on the information in this blog alone. Please see Graham’s disclosure statement on our website. 

About Graham

Hi there, I’m Graham and I started Velocity Financial nearly 20 years ago. I had for many years been running youth development programmes for The Salvation Army and I liked the idea of continuing to help people thrive in other areas of their lives. It started with helping first homebuyers, and I now work mostly with business owners. This is around planning, lending, and managing risk for them and their staff. I’m passionate about community and connecting those in need with opportunity. I’ve been very privileged to do this in my previous career, now in my business and also for 20 years as a Trustee of the Te Aro Health Clinic. Our clinic delivers high quality healthcare for Wellington's most vulnerable and I'm very proud of the fact that Te Aro is now an integral part of Wellington City Health system. I work in New Zealand's two best cities, Tauranga and Wellington. In Tauranga I swim, bike and run (maybe YOGA if I'm feeling particularly aware!) and in Wellington I mostly seem to buy my adult children dinner and drinks.

‍

‍

‍