Those who bought at the height of the boom may soon owe more than their homes are worth
Home buyers who purchased at the peak of the boom are facing a collision of rising interest rates and tumbling home values that may push many into negative equity by the end of 2023, according to a new report.
Negative equity occurs when a homeowner owes more on a mortgage than the market value of their property.
The average capital city apartment owner who bought with a 10% deposit in November of last year will face -5% negative equity by the end of 2023, while those who purchased a house at the same time will face negative equity of -4%, according to an analysis by RateCity.
The analysis is based on ANZ’s forecast of the median unit price in Australia’s capital cities dropping by 17% between purchase and December 2023, minus the debt the borrower would already have paid down in that time, according to The Australian Financial Review.
A Sydney apartment buyer will be in negative equity of -8%, while apartment buyers in Melbourne, Brisbane and Hobart will be in negative equity of -4%. A house buyer in Sydney will be in negative equity of -7%, while house buyers in Melbourne and Hobart will see negative equity of -4%, AFR reported.
Most lenders require deposits of 20%, with lower deposits often requiring the borrower to take out lenders’ mortgage insurance. However, Glen Hare, founder of financial advice firm Fox & Hare, told AFR that many first-home buyers will purchase with deposits of 10% or less, which can put them at higher risk of sliding into negative equity when the market falls.
Most homeowners’ properties are still worth more than they were prior to the COVID-19 pandemic. However, ANZ economist Felicity Emmett told AFR that many new homeowners are facing a “difficult time” as rates rise and prices fall.
First-home buyers usually enter the housing market with lower deposits and higher loan-to-value ratios. They also generally have lower incomes and savings buffers, Emmett said.
“Those who bought after the really big run-up in prices that we saw until early this year [and] through 2021 might be in a position where their home is worth a bit less now than they paid for it,” Emmett told AFR.
Approaching the serviceability buffer
Since May, the Reserve Bank has hiked the cash rate a total of 2.75% – with further hikes likely. That means new mortgage holders are approaching the 3% serviceability buffer – established in October of last year – that lenders use to assess whether a borrower can meet loan repayments.
Those who purchased before October 2021 faced a buffer of just 2.5%, which has already been overshot, AFR reported.
“That buffer is quite important, especially for those recent borrowers that might be a little more stretched,” Emmett said.
A buyer who took out a 30-year mortgage with a major bank to purchase an average capital city apartment in November 2021 has seen their monthly repayments climb from $2,366 a year ago to $3,271 today, AFR reported. That could rise to $3,630 by next May if the cash rate reaches ANZ’s forecasted peak of 3.85%.
‘Stay the course’
Sally Tindall, head of research at RateCity, said that borrowers who purchased at the peak of the market should simply focus on paying down their debt.
“No one likes the idea of buying at the peak, but if that’s you, take a deep breath and stay the course,” she told AFR. “While you might be able to buy a similar place cheaper now, what you hopefully have is a fantastic place you now call home. Often it’s hard to put a price on that.”
Tindall said that rising interest rates will be a bigger problem for many homeowners than falling values.
“If a person’s equity falls into negative territory, lenders are unlikely to take them on at all as a new customer, which means they’re stuck with their current lender,” she said. “Borrowers who can’t refinance their loan because of their equity position should still negotiate with their lender for a better rate. This will help them make their monthly repayments, and potentially extra, so they can break out of mortgage prison faster.”
Have something to say about this story? Let us know in the comments below.
