Sinking into negative equity

The spectre of negative equity is creeping across the Australian housing market. According to RP Data’s first Equity Report (below) Queensland leads the way with 6.3 per cent of homes in negative equity, while the Australian average sits at 3.7 per cent.

On the good side 41.3 per cent of homes in Queensland are more than double what was paid for them. However, given the equity to loan ratio of our banks these numbers are quite worrying. A sustained uptick in unemployment is definitely something to be very concerned about at this point.

It must be noted that the definition of negative equity defined in the report is not correct because it is a measure of outstanding debt to the current value of the property. I am sure that RPData don’t have access to the outstanding debt records for each loan, so in fact this an estimation of a property owner’s financial position based on sales histories.

From the report:

Across the country just 3.7 percent of home owners are in a position where the original purchase price of their home is lower than the current value of their home, however there are regions around Australian where weak housing markets have created higher rates of negative equity. Focusing on Statistical Divisions (SD) around the country, the analysis shows the regions which typically have the greatest proportion of properties with a negative level of equity are located in Queensland and Western Australia.

This should come as no real surprise considering both markets have been particularly weakperformers during recent times, most notably within coastal markets which had previously been supported by tourism and the ‘sea change’ phenomenon.Five of the ten regions with the greatest proportion of negative equity properties are coastal.

The Far North region of Queensland which includes areas such as: Cairns, Palm Cove, Port Douglas, Innisfail,Weipa and Atherton has recorded the greatest proportion of properties in a negative equity position at 13.5 percent of all homes. The housing market within the north of Queensland has been noticeably weak and has felt the full brunt of the economic downturn. House values in the region have increased by just 3.2 percent annually over the past six years and unit values have grown by 2.8 percent annually. Although values have risen over the period, if we focus on just the last three years, house values are currently -7.3 percent lower than they were three years ago and unit values are -20.4 percent lower. The vast majority of home owners that have purchased since 2008 are likely to be in a negative equity position

I am not surprised at all.

The full report is below, however if I didn’t know any better I would swear it wasn’t a final draft.

This data is four months old. My concerns about Australia’s financial stability have just gone off the charts.

RPData Equity

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  1. Do you think anyone proofread it? Surely the first sentence you quote should read:

    ‘Across the country just 3.7 percent of home owners are in a position where the original purchase price of their home is HIGHER than the current value of their home…’

  2. I just made a comment on this in the Sydney housing thread.
    North Queensland real estate is in a world of pain. Young bloke next to me bought with the Rudd money. Didn’t have reliable employment then and still doesn’t. Should never have been given money.
    Anyhow, has tried to sell. Three open homes and not a soul had a look. Two failed auctions. I’m scum because I told him what it was worth. Now off the market and waiting for the price bounce.
    Lots of stories like that up here. First Home Buyer land is hurting…along with the specuvestors.

    • No sympathy for specuvestors. Grittins, however, would be proud of all the young blokes who bought with Rudd money. Ignorance of a global debt crisis sure doesn’t feel like bliss with negative equity.

      • Gittens. Yes, well…
        I have decided I’m going into business. I am going to sell sets of fine china dinnerware with the photo of a MSM economist on each plate. Each set will have four different spruikers on display.
        These will be available through the your favourite weight loss centre.
        Try keeping your food down after seeing that!

    • Don’t laugh too hard. When GFC part II arrives, these jokers are the ones that are going to get bailed out. Disgraceful.

      • It’s the banks that’ll get bailed. Some of these “jokers” are going to end up with a massive debt or bankruptcy on their heads.

        • Not only that, but we will most likely have to face up to the fact that the government will be eyeballs up in debt that we’ll have income tax increases to cover the interest payments, never mind the principal on the debt.

          It won’t take much for the federal and state budget debts to rise to levels where it becomes difficult to manage.

          Question is, will the governments enforce austerity leading to deflation?

  3. Their definition of Negative Equity is wrong:

    “where the current value of their home is less than what they originally paid for the property”

    It should be “where the current value of their home is worth less than the outstanding debt”.

    Not sure if it just a typo or if their figures really just show what proportion of properties have fallen in value.

    • You are right, it is the current valuation vs the last sale price. But the report is still very informative.

      • They actually do clarify it as a base-level estimate and not factoring in debt levels.

        It is a pity. Based on the charts on p4 we would be able to calculate the potential losses to the banks and dismiss their overly optimistic estimates of f/a losses in an extreme property crash.

      • rational investor

        That assumption probably isn’t too far off. If you assume anyone with market price below purchase price probably didn’t purchase too long ago, over the course of a 30 year loan the first few years you pay almost nothing off the principle.

  4. +1 great stuff in that report. Sheds some light on exactly what we have been discussing here for months.

  5. Not to mention that the JeldWen-HIA report shows that new home sales are still falling. HIA makes a direct call for interest rate cuts and stimulus.

    Anecdote time…I went to an auction in Canberra on the weekend (not registered to bid). New-ish home, about 3 years old, all mod cons, but pokey bedrooms and no yard to speak of. Auctioneer called for opening bids at 600k, but no takers. Then there was a vendor bid at 550k. The only genuine bid was 551k and the auctioneer pleaded the bidder to raise to 555k, which he did. No other bids, passed in. Today the agent calls me up to see if I was interested. Told him I thought the auction result was fair and not interested at the moment.

    Canberra has to be the most highly inflated market in the country. Full of public servants with high salaries, secure(ish) jobs and vendors with an expectation of house prices to the moon. But now it seems to be turning with people noticing that plenty of auctions getting passed in – the urgency to buy today or miss out forever is waning. If it’s happening in Canberra, it’s really got to be happening everywhere. It’s gotta be stimulus or bust now, I’d say.

    • I’d put money on stimulus if Canberra is hurting.

      The Pollies and public servants won’t care if its happening to everyone else, but if its happening to them…………

      • +1

        They have a guaranteed pay cheque so why should they care. Also, a lot of new hires for all the environmental dept’s coming to Canberra will boost that sector. Housing finance is still tight, but not like the rest of the country; that’s according to a builder I know there.

    • I don’t think the salaries are that high, they might be steady, but certainly aren’t high enough to pay the huge asking prices mentioned above. It’s only the senior levels that get quite good money.

      Canberra was a place I contemplated moving to until I saw the housing prices, which are just as high as Sydney now. Pretty amazing for place that is surrounded by flat paddocks as far as the eye can see.

  6. In the American context, homeowners with ‘negative equity’ are described as ‘underwater’ because they owe more than the property is currently worth.

  7. Follow “DrHousingBubble” blog from California for a while to get an eyeful of what could yet be ahead for Australia.

      • Depends on the state in America. Some states people can post the keys to the bank and walk away, in others they can’t.

      • Non-recourse loans in the US are not nearly as common as you may think.

        Additionally, some of the handful of States that allow non-recourse loans, also have provision for default judgements if judicial foreclosure is pursued.

        This permits the lender to pursue assets other than the encumbered property.

        The non-recourse argument is one that is played for all that it is worth (and then some) by the “it’s different here” brigade.

        And I am not implying that you are one of them 🙂

      • U.S. Non-Recourse States
        North Carolina
        North Dakota

        One Action States
        Lenders are only permitted a single lawsuit to collect mortgage debt.

        New York

        I think Detriot is in real bad shape, Michgan isn’t on the non-recourse list. Tough(er) penalities, or tying debt to the person still yields real bad results.

        Cool Avatar (or Gravatar) Karan.

        • Florida is NOT a non-recourse State.


          Florida only offers judicial foreclosure and only requires one notice to the borrower. There is a right to redemption until the clerk has formally filed a certificate of sale. A deficiency may be pursued by the lender for up to four years provided the debtor(s) are personally served. The debtor can request a trial by jury and the existence of deficiency along with amount of said deficiency is entirely up to a judge.”

          • Man its’ all so complicated. Now I see why we live in a world of lawyers, solicitors, or attorneys (US).

            Thanks for the correction.

  8. Interesting data, but as you say four months old, and the next report will be worth waiting for. However, if the non speculators can keep up the payments then -ve equity is not the end of the world. As fot the speculators and I have a friend with five Docklands apartments it’s going badly..

  9. If it was this bad then, it’s surely worse now. While I like to think that the recent panic in the markets will put some people off, I’m hearing a lot of people I know wanting to buy a house now as they aren’t going to go down anymore and will increase soon.

    I think it is really different this time in that the property boom has gone on longer and harder than ever before. It has changed people. It will take some serious pain before people accept that houses will not go up for a long time, and even then, from a much lower base.

    • Yes, the “I missed out last time and I’m not going to miss out this time” (referring to GFC pull-back in prices before the Govt bribed people into again bidding up prices) is definitely out there. I suspect people are a bit more cautious this time around, however, given Australian economic concerns. And if the housing downturn gathers pace, they’ll be put off further.

  10. Thanks for posting. A few comments
    1. Ignoring the debt position is problematic because this is the key to understanding the ‘hidden’ fragility of the housing market. 5% ‘negequity’ under the above approach does not sound too bad, but with a 95% LVR loan (aka the FHB Special) this is a 100% loss of equity.
    2. This makes a huge statistical error in using the automated valuation models to estimate distributions. Their models effectively average property ‘values’ so the is little distribution of pri e changes other than between regions. But in reality there is a much greater dispersion of sale prices than indicated here. So while there are more houses that have appreciated significantly, there are also more that have declined by a larger amount. The ones that decline have a tendency to default, and it is this adverse selection that really caused the US market to collapse (NOT subprime).

    • I agree – whatever other virtues the report has, its use of the terms ‘equity’ and ‘negative equity’ is seriously weird.

      Why not use something like ‘capital gain or loss’ instead?

      This is such a glaring oddity. Are they just very sloppy with their terms? Or are they trying to change the terms of the debate about house prices and debt?

      [Reaches for tin-foil hat.]

  11. I’m sure that all it would take is some token stimulus from the government, and the fearful sheeple will BUY immediatley. (That is if they can get a loan).
    The real kicker will be un/der-employment and underutilisation increasing substantially.
    No job, no loan, no house for FHB’s, combined with the recent buyers trying to sell with -ve equity…..oh dear.

  12. I’m a little cautious about this, and not just because editorial and formatting comments and have been left in the report. ‘Notes on methodology’ states that 84% of RP Data valuations are within plus or minus 15 percent of the actual sale price. That’s a pretty large margin of error, especially if RP Data deems that a dwelling is in ‘negative equity’ if it was purchased at $400K and is now worth $395K.

    • If we assume a normal distribution of errors, than their number will still be quite good on average as they are just as likely to understimate price as overestimate.

  13. The other interesting one to watch is the ole turning bad debt into good debt trick of using the equity in your principal residence to purchase an investment whether its shares or property, the properties end up being double geared, ie the principal residence is falling value as well as the IP, doubling the rate in the fall in equity.

  14. What more people need is another good earthquake or flood or bushfire to make them realise how much risk they have assumed by tying up so much of their past, present and future income in the one ‘riskless’ asset. It seems nothing else will change the delusion that ‘property always goes up’…until, one day, for an unsee reason, it doesn’t. Until it sinks in that a commitment of ~30 years worth of risk, even with the tenant ‘paying it off for them’ isn’t worth the current level of prices, prices will continue to rise.

  15. I guess negative equity had to start sooner or later (there’s always the last set of buyers at the end of the boom). And about time!

    It will be interesting to see how this possible new trend of negative equity affects prices and the attitudes of buyers/sellers and banks.

    eg 1. With margin loans the margin calls tend to cause further falls due to large share dumpings (to few buyers).

    eg 2. Will property owners who see falling prices all start dumping their properties for fear of getting out before TSHTF massively?


  16. That chart on page 6 is showing the percentage of houses that are worth more than double their original purchase price.

    Terrible labelling really.

    • Yes, but I think the point made about about debt vs value above is a valid one.

      How many folks have used that additional equity to finance lifestyle? The value may have doubled, but if you have drawn down on that equity you can be a lot closer to the edge than those stats suggest.

      Now not everyone has treated their house like an ATM course, but enough have to make me think thing are not as comfortable as they are made out to be.

  17. I am more worried about China than Australia to be honest. When China goes down it will only accelerate what is happening in Australia.

  18. I think this report is certainly interesting, but I’m also curious as to:

    1) how much equity has been withdrawn from those cohorts showing higher levels of ‘equity’ (as defined in the report) i.e. people who own a home that is valued at significantly more than they paid for it, but who have since re-mortgaged to access that equity; and

    2) where the withdrawn equity for those who have accessed equity has been directed – how much was re-geared into a house purchase?

    Applying some very plausible scenarios might start to make even those ‘safer’ cohorts look a little shaky.

    Or thinking about it differently, if a single person owns both a higher equity and (one or more) lower/negative equity home(s), it doesn’t take much of a decline in prices to erode the higher equity position.

    Just thinking out loud here…

  19. The definition of negative equity invented by RP Data implicitly assumes that all home owners always carry a debt of 100% of what they paid for the house.
    “RP Data’s Equity Report provides a ‘baselevel’ estimate of equity accumulation across the Australian housing market by measuring the difference between the original purchase price of a home and the current valuation for individual properties around the country.
    We call this a ‘baselevel’ estimate of equity, as our analysis doesn’t factor homeowner debt levels into the analysis.”

  20. add an example to the last post…
    Cash buyers are included in RP Data’s negative equity totals if their house fell in value. That is obviously absurd.

    • Yes, excellent point. The only ratio that counts is the outstanding debt vs what you can sell it for tomorrow. All else is smoke and mirrors.