Negative equity talk is nonsense – and besides, it’s irrelevant

“Home price slide hits mortgages”, “Increased number of homes with negative equity”, “Homes with negative equity on the increase”.

Just three headlines– from many – out of last week’s press.

Most articles started with variations of the following two sentences:

“The share of homes with mortgages worth more than the property’s value increased at the end of the last year as the housing market stalled and prices turned lower. The rise suggests an increase in negative equity, where a mortgage can be worth more than the value of a house.”

The Australian Financial Review – which really should know much better – started off by saying, “About one in seven Australian homes bought in the last five years is worth less than its purchase price. This potentially has pushed owners into negative equity.”

The source of this pessimism is data-provider RP Data and its 2011 December Quarter Equity Report. This report states that slower capital growth in the last five years, combined with more recent value falls, had left 16% of households (one in six, not one in seven, by the way AFR) bought in this period below their original price.

The document goes on further to say that:

• Three out of four households with negative equity bought in the last five years.

• The incidence of negative equity is highest in Queensland (12% or one in eight properties) and Western Australia (8.5% or one in 12 properties). Yet curiously, the Australian average sits at 16% or one in six, according to RPData.  Hmmm.

• Negative equity is worst in north Queensland at 23% (or let’s say one in every fourth home); on the Gold Coast at 19% (or one in every fifth dwelling) and at 15% (or one in every sixth home) on the Sunshine Coast.

Yet the data provider states that this analysis does not look at debt levels by owners, only the price paid for properties and their estimated current value.

Now, before I reply to this nonsense, some facts about the Australian housing market.

• According to RP Data – yes, the same RP Data – Australian dwelling prices, aggregated across the eight capital cities, rose by 8% in total over the last five years. Melbourne’s values rose the most, up 18%, while Brisbane’s fared the worst, falling by 6% since early 2008. Most of this fall was over the last 12 months and due largely to last year’s flood. Dwelling prices across regional Australia, according to our own work, have risen by 29% since the GFC.

• According to AFG, the average loan to value ratio across Australia, as at March this year, is 68%. Yes, that means that most new borrowers have a third share or equity in the dwelling that they are purchasing.

• Over the last five years, the average Aussie household has been saving 10% of its income. This has been done by paying off mortgages ahead of schedule, rather than reducing payments in concert with declines in interest rates.

• Mortgage rates, while they have risen a little bit in recent weeks, have fallen by 2.5% (often more) since the GFC.

• According to the ABS, last year, on average, households in Australia held asset values of $839,000, partially offset by average liabilities of $120,000. After adjusting for CPI, our current net average household wealth of $720,000 is 30% more than in 2004.

• Equity in home ownership is about $300,000 across all Australian households, and accounts for 40% of total household wealth. Owner-residents – remember, these are official statistics and they measure actual debt levels, unlike RP Data’s study – enjoy owning, on average, four-fifths (81%) of their principal place of residence. For investors, the average equity holding is 74%.

• In Queensland, the average equity for owner-occupation is 78% and for investment property is 63%.

• And here is the kicker – for the 25 to 34 age cohort (i.e. first-home buyers), the average equity across Australia is 46% for owner-residents and 51% for those young ones smart enough to buy an investment property. For those aged between 35 and 44, it is 65% for owner-residents and 60% for investors.

So, what’s really left to say?

Firstly, journos need to get off their behinds, stop regurgitating the media releases put in front of them and start asking questions. Do you really think that one in every six dwellings out there has negative equity and one in every four on the Gold Coast, for example, owes more on their mortgage than what the property is actually worth? I mean really, come on. And if you are too young to own something, just ask your parents what they think.

On the commute home tonight, just look out the window and ask yourself how it could possibly be true that every sixth household is in major financial stress, what with the new cars in the driveway, the kids going to private schools, the overseas holidays and likely collections of tablets, smartphones and plasma TVs in every home.

While the general coverage of the RP Data report was misleading, it does raise important issues about current loan-to-value ratios. Many first-home buyers and investors borrow 95% plus mortgage insurance, so the loans were virtually 100% of the value of the property. Over the life of a traditional home loan, the reduction of principal is minimal at the beginning of the loan term, so some buyers might owe more than what their properties are worth, if they borrowed 95% plus within the last three to five years.

To argue for higher minimum deposits, for example, might have been a more constructive way to air this data – and something you would expect from the country’s leading financial daily – rather than just scaremongering.

Moreover, as long as those people can afford the repayments, there is little real risk to homeowners.

Finally, too many property-related studies drive while looking in the rear view mirror. Things seen in the rear view mirror always look much larger than they really are.  Few drive looking out of the windscreen. Looking forward, higher rents are finally pushing first-home buyers into the market and also attracting investors. End prices will also, in due course, rise.

To quote a recent blogger in reply to one of the said articles above:

“People with a single live brain cell would understand that if you bought a house and stay there – negative equity has the same relevance to you as an exploding star in the parallel universe.”

I hate to get all cosmic with you, but that about wraps it up.

Michael Matusik is the director of independent property advisory Matusik Property Insights. Matusik has helped over 500 new residential developments come to fruition and writes the weekly  Matusik's Missive. The Matusik Missive is free, however, reprinting, republication or distribution of any portion of this material, or inclusion on any website, is strictly prohibited without the written permission of Matusik Property Insights and may incur a charge.