“Negative equity” hits thousands of WA homeowners

Earlier this month, the Western Australian (WA) Chamber of Commerce noted that the WA economy had fallen into technical recession, experiencing two successive quarters of negative economic growth in the last six months of 2010: 

Western Australia is generally regarded as Australia’s economic engine room with its booming resources sector, but its manufacturing and retail sectors are struggling.

The WA Chamber of Commerce says the state’s economy experienced a technical recession in the last six months of last year.

“The state of Western Australia very much mirrors the broader national economy in that there is very much a two-speed economy at play,” said John Nicolaou, the chamber’s chief economist.

“You have the resources sector and anything connected to that sector that’s performing very strongly.

“Against that you have other sectors in the domestic economy, particularly those consumer facing sectors which are struggling.”

The chamber has looked at state economic growth figures in the latest national accounts data from the Bureau of Statistics, released early in March.

John Nicolaou says the figures show that WA went into a technical recession in the last half of 2010, with two quarters of negative growth.

Now The West Australian newspaper has reported that thousands of WA homeowners that purchased at the top of the market in late 2007 and early 2008 are in “negative equity”.

Tens of thousands of Perth homeowners who bought property at the top of the boom before the global financial crisis are facing big losses as the market goes through its worst period in almost two decades.

Special analysis of median house and land prices across the city reveals that people who bought at the peak of the market in late 2007 and early 2008 hoping to see their investment grow now hold “negative equity”.

Once inflation is taken into account, a person who bought a median-priced block of land in Perth three years ago is at least $48,000 worse off, while someone who bought a median-priced house is down by almost $25,000.

The median price of a house sold in Perth grew 162 per cent between early 2002 and the end of 2010, while the median price of a residential block of land rose 182 per cent.

But all that growth was up to the peak of the market in late 2007.

Since then, the median price of a house has lifted just 3.2 per cent to $480,000, while for land it has fallen 9.4 per cent to $240,000.

However, this does not take into account movements in the inflation rate.

Between 2007 and 2010, overall prices in Perth have risen 8.7 per cent.

If house prices had kept pace with inflation, the median price would now be $505,000.

For someone who borrowed all the value of a median-priced home in Perth, that translates into a loss so far of $25,000 coupled with interest repayments of $75,000 over the past three years.

It is worse for people who have bought land.

If residential land had kept pace with inflation, an average block in Perth would now cost $288,000. That translates into a loss of $48,000, given the current median price.

It’s the worst performance by the Perth market over three years since the early 1990s when median house prices fell.

To be fair, The West Australian article is a little misleading, since it claims that thousands of WA home owners are in negative equity, whilst at the same time noting that home prices have in fact risen 3.2% since 2007 (see below RBA chart). For negative equity to occur, WA home prices would need to have fallen in absolute terms, not inflation-adjusted terms.

Still, the article does highlight what an ordinary investment WA housing has been since 2007. Moreover, WA home prices are clearly trending down, having fallen 4.1% over the past 12 months according to RP Data (see below chart):

All up, the articles by the WA Chamber of Commerce and The Western Australian could have the effect of further denting the confidence of WA households, thereby potentially acting to further reduce expenditure, economic growth and home prices.

Western Australians better hope that the commodity boom continues unabated, since it looks like they can no longer rely on debt-fuelled consumption on the back of rising asset prices to drive the economy. 

Cheers Leith

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Comments

  1. I think Australians are finally begining to get the message.
    It ain’t different in Oz. Ireland, Britain, Uncle Sam, here we come.
    And it ain’t gonna be pretty.

  2. How can land drop by $48k but houses only $25k?? Isn’t a house built on land?? Or is that article crap??

  3. >To be fair, The West Australian article is a little misleading, since it claims that thousands of WA home owners are in negative equity, whilst at the same time noting that home prices have in fact risen 3.2% since 2007

    Let us not forget that people wrap up stamp duty, legals, mortgage insurance and other assorted muck in their loans… and then there is “equity mate” !!

    Just because home prices are up by 3.2% doesn’t mean that people aren’t in negative equity, it just means that it is less likely.

  4. You know what is interesting about these 2 articles and now the media is starting to focus on the negativity of property. Everything has been so positive and Australia is different for years. Once the media jumps on the property is a negative fad then people’s confidence will go down the tubes. The same thing happened in the US and Europe. It is just interesting that negative property media articles are now starting to circulate.

    • 2 sides to every coin – booms & busts suit some and don’t suit others. I completely welcome the “negative” news on property because from my perspective it is actually very positive.

      Oh, and Negative Equity just means that someone paid too much.

  5. Negative equity means the amount owe is greater than the price of the asset. We’re not there yet. The chamber of commerce talking down the economy in order to generate some kind of government assistance. I expect an increase in the ‘First Home Buyer’ subsidy from the WA government in the near future.

  6. This might come off as harsh, BUT for my own selfish reasons i hope it gets MUCH MUCH worse……..

    • I do too JC as I really would like my kids to have the ability to buy a home when they are older. It really needs too.

      • Me three. In 2007 properties were already ridiculously high with prices rising each week as people rushed to buy for fear of missing out. In 2008 we had the beginnings of the property downturn, but as we all know, the government intervened to push the prices to insane new heights. We have the beginnings of a downturn again, but real estate has a very long way to fall before a more realistic value is reached.

    • I totally agree and its not selfish. Its the selfishness along with greed and stupidity that the market is where it is. I would like to think my children along with yours and others can afford to buy some day, let it all get ripped apart and damage those pockets from greed ( especially multiple owners ) and start again.

  7. Yes the article is a mite alarming, not just because of the negative equity claim and rising house prices.

    I works on the premise of financial worth IF the property were to be sold.

    What if a house is going to be lived in for the next ten or twenty years? (Yes I know the average is seven) There are other values such as a stable home.

    If the house, or home rather is to be lived in permanently then the equity value not as important.

    It is only if the equity is going to be USED in some way or another does it have value.

  8. I’m not sure where I got this view from now and seem to have held onto it for many years, I share it to continue the discussion.
    “the good times in Australia start in WA and end in WA” if this is true then we are at the beginning of the end of this round of the good times. House prices are falling now and will continue to do so for some time, the old adage “let the buyer be ware” may also be true.

  9. @michael. What you say about paper loss/gain is true… As long as theyre not selling it shouldnt matter. However, as it is now households are too stretched out with their living epenses and wages have not kept up with inflation. When property values drop and they cant finance their lifestyle, things will start rolling downhill.