Those who bought during the pandemic boom are likely finding themselves in negative equity
About 120,000 Australians who bought homes with low-deposit loans at the end of the pandemic boom are likely to have already fallen into negative equity, according to data from CoreLogic and Standard & Poor.
A total of 289,125 homeowners who purchased between November 2021 and April 2022, when house prices were high, were also getting closer to negative equity as prices fell 8.9% from their peak, according to The Australian Financial Review.
The figures are based on CoreLogic records showing that 1.188 million homes were sold between March 30, 2020, and April 30, 2022, and S&P’s estimate that more than 40% of new mortgages taken out during the pandemic boom were low-deposit loans, AFR reported.
Experts say that many of these homes could be worth less than their mortgage within months, especially if, as some economists predict, the cash rate rises to 4.1%. Home prices have been driven down from their pandemic peaks thanks to nine consecutive rate hikes by the Reserve Bank.
There is little evidence so far that households are under mortgage pressure, AFR reported. However, S&P’s Performance Index found that mortgage arrears are starting to rise at a faster pace.
“Across these borrowers, first-home owners with limited savings buffers are more at risk of mortgage stress, particularly in Sydney and Melbourne, where property price falls have been more pronounced and household indebtedness is generally higher,” Erin Kitson, director at S&P Global Ratings, told AFR.
Arrears creep up
Prime mortgages increased in December to 0.76% from 0.65% the previous month, but nonconforming mortgage arrears – including low-deposit and large loan amount – continued to rise, reaching 3.2% in December from 2.66% in November, AFR reported.
That’s more pronounced than in previous years, Kitson said.
“The arrears cycle typically peaks around January and February. The magnitude of arrears increases this year is likely to be greater than in recent years, given the steep increase in interest rates and the Australian RMBS sector’s high exposure to variable rates,” she told AFR. “Arrears are rising off historical lows and remain below long-term averages. But as interest rates continue to rise, this state of affairs is likely to change.”
Listings still low
Eliza Owen, head of research for CoreLogic, told AFR that the lower volume of listings – which is currently 27% below the five-year average – would help slow the rate of price declines that could compel owners to sell.
“There’s no strong evidence of large-scale forced selling so far,” Owen said. “New listings over the past 12 months have fallen short of annual transactions at around 477,000, so there’s still a bit of a supply-demand imbalance that might be insulating the downturn. As it is, we’ve seen nothing but a broad improvement in some of our key housing market indicators coming into January, which we largely attribute to an ongoing lack of listings. The monthly pace of decline in national home values has been shrinking since August, and clearance rates are broadly improved on where they were at the end of last year.”
However, sharp drops in house prices have likely pushed many NSW residents who bought during the pandemic boom into negative equity, AFR reported.
During the COVID boom, 376,462 homes were sold in NSW, with about 83,276 buyers transacting at the height of the boom. Data from PEXA shows that during 2021, 34% of these purchases were made with higher-risk loans of 90% or above loan-to-value ratio. That share fell to 30% in 2022. That means that about 26,648 homeowners may already be underwater since prices tumbled by 13.9% from their peak, AFR reported.
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In Victoria, 260,912 homes were sold during COVID-19, with 66,478 of those sales occurring at the tail end of the boom. One in three are likely to fall into negative equity in the next few months, according to AFR.
In Queensland, 294,757 homes were sold during the pandemic boom, with 73,517 of these sold in late 2021 and early 2022. Of those, about a third are likely already underwater after prices dropped by 10.7% from their peak.
Rate hikes squeeze
Shane Oliver, chief economist at AMP Capital, said the impact of the RBA’s repeated rate hikes is starting to squeeze household budgets.
“We’re getting to the critical point here in terms of the interest rate tightening cycle, and therefore the risks are getting a lot higher,” he told AFR. “You just don’t know what the tipping point is for the property market. The RBA could raise rates a lot more from here and there’s no impact, or we’ll have just one more move, and you could be in trouble.”
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