The tyranny of negative equity

Above is an interesting discussion on negative equity between Martin North and property insider Edwin Almeida.

Both claim that around 10% of borrowers could be in negative equity. They also warn that banks could soon force some borrowers to sell.

Comments

  1. LabrynthMEMBER

    Unable to listen but from memory Peter Fraser put forward some decent evidence years ago showing that banks can’t ‘margin call’ a residential loan if the repayments are made.

    Even if you go to refinance the worst outcome is that they say No because there isn’t sufficient levels of equity, they can’t ask you to tip in more money to maintain the same/minimum leverage as when you took out the loan.

    • C.M.BurnsMEMBER

      Peter Fraser said a lot of things, nearly all of which were proven to be completely false (ie, he was lying about the behaviour of mortgage brokers and banks) by the RC.

    • I’ve seen mortgage conditions that say you are in default if you hit negative equity and the bank can require you to top up equity, or purchase LMI, or sell the house. The question is whether the bank would want to enforce this en masse, as it implies they are marking their housing book to market, which they would not want to do as it would increase their capital and risk weight requirements and they’d explode.

      • It was quite a while ago( early 80’s), but l saw a family who had their home on the line for a business loan.
        In a similar situation,where values were falling and money tight, the bank foreclosed, despite them being up to date with all mortgage payments, and having a demonstrably adequate cash flow.
        They had 24 hours to move the family and all their belongings ( 4 children under 10) out of the house into a rental property.
        The business was then onsold to a friend of the bank manager- for a relatively cut price . Geelong is a small town, and word gets around.
        The business was very viable long term.
        I think it’s unlikely to happen wholesale, but cherry picking seems to occur.

      • “They had 24 hours to move the family and all their belongings ( 4 children under 10) out of the house into a rental property. The business was then onsold to a friend of the bank manager- for a relatively cut price .”

        Um, sounds like a textbook Strayan business practice.

        You see, “a demonstrably adequate cash flow” will suddenly become a demonstrably inadequate cash flow once the moving costs are accounted for, and just like that, the banks can defend its practices.

        Straya will soon in dire need of “businesses very viable long term” so this kind of practices will be in full swing in no time!!!

      • I completely agree there will be some cases where banks enforce this and display their total [email protected]

        Also, because of this same cynical self interested [email protected], banks will not do it much, because it would self-eviscerate their own loan books and they would collapse.

      • Even StevenMEMBER

        Pretty sure banks have to mark their LVRs to market on an ongoing basis in determining their capital requirements. How assiduously this is done (or monitored) I cannot say.

      • They are MEANT to where there’s a material change in valuation. So there’s a few bits of wriggle room there, plus they just won’t, because CHUNTS.

    • The immortal Peter Fraser made a very confined comment.

      Read the fine print on your mortgage. It unquestionably states the bank can revalue the property and oblige an equity top up or other remediation at any time. Generally, banks don’t force borrowers in NE into default if they are meeting their repayments – they are rational organisations with other borrowers who are in more trouble than that.

      NE is no holiday. The indebted can’t sell without crystallising their losses. Many would be bankrupted. So they cant move to take a better job elsewhere, or if family circumstances change and the number in the household rises or falls. Anyone with teenagers or young adults appreciates everyone’s need for privacy.

      Nor can they borrow to renovate or extend. They are in serious trouble if they suddenly need a new roof or to replace a sewer. Nor can they get a car loan if their ride blows up. They will have to save up for it.

      Ten years after the GFC, 9.5% of US households are in NE, according to Bloomberg.
      https://www.bloomberg.com/news/articles/2018-05-29/millions-of-u-s-homeowners-still-under-water-on-mortgages

      A decade in housing paralysis Is a terrible thing. Avoid.

      Don’t Buy Now!

      • “They will have to save up for it.”

        Sounds like a good idea. Perhaps it is a good thing that NE is spreading to all corners of the continent.

      • I saw a 4corners show about how a family on the Central Coast were asked to tip their super balances in to save their BnB. The reason was that CBA revalued the asset that BankWest gave them a loan for. The punchline was after the super balances were fully exhausted the bank foreclosed and sold their BnB for “market price”. So my Take, was the bank can do pretty much anything they want and you can’t do much about it

    • kiwikarynMEMBER

      I know two people who have sold properties and the bank took all the sale proceeds, not just the amount needed to pay the mortgage back. The extra was used to pay down loans on other properties, despite there being no issue with negative equity, LVRs or debt servicing.

      • The bank may well be doing them a favor, KiwiK. The era of thin equity has passed. Time will tell if this unilateral act means they have more free cash flow to put toward principal repayment and save the rest of their asset base.

        DBN!

  2. I remembered when we got back to the US August 2009. I had tons of family and friends that were in negativity equity. It was bad but I dont think it compares to the negative equity here in Australia. Now they are all in positive equity but had a few that lost their houses and got short sell or foreclosed. My sister and her husband litterly went to the bank and said fix our interest rate or here are the keys you can have it. It took them a few months but they got it sorted now they are in 100k plus equity before they were about 100k in the hole. Interesting to see whats going to happen here in Australia.

    • DominicMEMBER

      It’s easy to fix a negative equity problem — just print a huge amount of money and let inflation take care of the rest. This is precisely what the future holds for us here as well as any other major economy you can think of.

      A loaf of bread may cost $10 or $15 but your negative equity misery will be a distant memory 😉

      • Ah, that’s not how things work, unfortunately. The RBA “plan” may be to “manage” the massive printing so that a loaf of bread will only cost $10 or $15, but things tend to go wrong in Straya. A loaf of bread will instead cost $10,000 or $100,000 and then compound at a weekly rate of 20% or 30% from there.

      • DominicMEMBER

        Sorry, fellas, I was being facetious, of course. However, money printing via any number of channels is a dead cert in the future: QE, MMT, UBI, you name it. They’ll be looking for inflation, say 2-4% but they get it in spades, starting at 5 or 10% and then travelling north at a rapid clip. Once the genie is out what will they do: raise cash rates to 10%? Raise taxes by 5 or 10%? Lol.

        One word: toast.

      • @Robert

        Extremely cheap or free houses are nothing to be excited about for a potential buyer, not more so than extremely cheap or free pets. After all, what are their values if they are in ghost towns? You would not want to live in them even if you are paid to do so.

        Plus, houses literally eat money. They are like pets in many ways – nice things to have, you may even love them, but you have to keep feeding them for as long as you want to keep them, and you cannot simply discard them just because one day you decided that you no longer want them.

      • @dumpling,

        Absolutely zero implication intended that Japan’s demographics and consequent housing market are in any way positive. Just that some forms of property value deflation can’t be fixed by printing money e.g. if Japan’s inflation shot up to 1000% tomorrow, those places going for free would be going for free plus 1000% or still free.

        Btw you can’t discard a property if you own it outright, but if you are fortunate enough to still owe money on it, you can get the bank to foreclose, and if they can’t sell it, they’ll be liable for maintenance and the liability if a kid from next door falls in the pool. Leastaways, that was what happened in the states during the GFC.

      • LOL, very good, Robert.

        BTW, your “story” about the post GFC USA somehow reminded me of “lending a pet” services for responsible citizens (like http://www.lendapet.com.au/borrow).

        I must admit that I was wrong about the equivalence between houses and pets – it turned out that houses do not breed on their own, so they are one rank above pets.

      • @dumpling Psssst! Don’t look now, but your puppy mill equivalent In the housing world is the typical builder/land-banker/mom-and-pop developer…. sooooo you were saying about housing not breeding?

      • TripleBeamMiracleDream

        lol, been so long @ emergency rates…. they’ll just raise ’em guys, you won’t get a single sparkle from that fairy dust.

  3. I’ve always struggled with that “equity” thingy. It’s your “money”, but when you want to access that, you pay interest.

    • it’s just feel good imaginary money. It becomes money if you sell.
      If you wait and prices fall then you have feel bad imaginary loss and becomes real loss only if you sell. But the bad feel (stress) is real – sell or no sell.

    • PantoneMEMBER

      It’s not “your” money, it’s money that is owed to you. Subtle, but important distinction.

  4. Negative equity will sort the men from the boys. Serious property investors will brag about it whilst standing at the debt urinal. Mine is bigger than yours.

    Perhaps Domain and Nine-Fairfax can reboot a lifestyle and cooking program with Scott Cam teaching the bankrupt to make soup from old builder’s adhesive and bits of plasterboard and flammable cladding?

  5. The banks will not foreclose on people as the sight of people getting turfed out on the lawn brings an upswell of bad publicity. As in Ireland..a few got turfed out then thousands went out and protested..Govn and banks stopped the foreclosures and people in difficulty got to stay in their houses for many years, even when paying nothing on their repayments..some still negotiating with banks 12 years on.

    • Yeah but investors don’t get evicted, and there are plenty of ‘investment’ properties with no tenant. Banks can easily foreclose on these with zero publicity concerns.

      • Well, there could still be sob stories about hard working mums and dads (usually nurses and policemen) who were just trying to get a head. 😉

        Once the crash is in, crash pr0n will be everywhere as it makes people feel better to see others in the same boat as them or worse.

      • “who were just trying to get a head” – but ended up giving and arm or a leg or even a head to service the loan. 😁

      • You got it 😁

        Also it’s a classic specufestor typo from the property forums (along with “looser”, usually used to describe people like me).

      • BubbleyMEMBER

        The banks don’t want to foreclose. They don’t want to become rental property owners.

        They want lovely liquid cash, which requires no maintenance.

        I’ve have quite a few customers who are real estate agents. One was horrified that her agency had 9 foreclosures on her books but said the bank could have taken up to 50 but was working with the mortgagee’s to make sure they stayed in possession.

  6. Love that Edwin touches on the mortgage brokers talking about new vibrants pissing off back home. A few of us here have discussed it, but a few (ahem Peachy) claim they would never abandon this paradise. Will be interesting to see how the gummy Tarneit speculators will act.

    • DominicMEMBER

      Being saddled with a huge debt on an asset that is under water is incentive enough for most to just pack up and p!ss off.

      I don’t think we’re there yet but if it reaches a point where large numbers of home-owners are in despair and the general mood is bleak enough, the planes leaving this paradise will packed to bursting. It’s too tempting. Being in debt can crush you, especially if you have little or no hope of ever repaying it.

      • Straya is different.

        Poles could go anywhere in the EU.

        Our 3rd world visitors can’t go anywhere else in the first world. It’s here or back to Nepal…. there’s a reason why they’re not in Nepal at present.

      • @Peachy, Don’t be so sure about that. I know someone from one of these 3rd world sh1t holes (as we like to think of them) and he says that of all his peers who have left to go overseas, half of them regret their decision to live in the west. Reason apparently is that the west is expensive and they have to work like a slave.

        He says the only reason they don’t return home at the moment is they don’t want to lose face. But I imagine a massive unpayable debt will change their mind in this department. Apparently, all the people in his country watch the Hollywood movies and see “normal” people in large houses with a nice car etc. and they think that is how everyone here, US, UK, etc lives. When they find that is not the case they get disappointed.

    • Yep. I just went here in order to post to say that Edwin is clearly a moron because of that thesis.

      Those guys aren’t going back to Eastern Bumfeckistan to sleep on a dirt floor and drink muddy water just because they lost on property speculation.

      They’ll just declare bankruptcy and stay here enjoying the clean water, air, Medicare, etc. Banks will sit on these properties for a while so as not to unduly pressure the market. ….the government might come in and buy them from the banks in some other “housing affordability” sop (ie disguised bank bailout and property price boost). Mark my words.

      (Also he is a moron with his claim that children and grandchildren will inherit the debt. This is legally impossible in Australia.

      He is also a shortage denier)

      • We will see, but Peach please stop pretending the vibrants are dirt floor slum dogs. They are not. They are on skilled or student visas and they had the means to get to Australia. They have at least some options.

        To me it is a very interesting open question what will happen. There is no analogous country experience I’m aware of that is a fair comparison.

        – not EU polish migrants, although it’s close
        – not Mexicans illegally crossing into the US

        We will see.

      • I never said they are slum dogs. I just say that where they come from is a shthole. Australia was clearly their best option.

        Mexicans going to US are very comparable, I maintain.

      • Your idea of the living conditions that these people live in are far out of whack with how they actually live. The dirt poor ones do not emigrate, they lack the financial means and the ability. I know a lot of foreign students from a great number of countries, some of which are considered very poor, and I can assure you these students are from the middle class in these countries. Hence, returning home is not that terrible a thing.

      • Peachy you said dirt floor and drinking dirty water. That’s slum dwelling.

        Trotly is right.

      • Know a few Indians who have gone back. Most are too used to being pampered and having cheap hired help like maids, which simply isn’t accessible or affordable here.

      • No, no, Arrow and trotly. In Peachystan (as Australia shall hence-forth be known) the only people that have ever immigrated here were living 10 to a cardboard box and drinking donkey urine. There are no Indian doctors, Chinese billionaire developers, Malaysian lawyers or Indonesian academics. In fact we are lucky they could get on the plane under their own steam! Upon arrival they immediately cut up their passports from the home country. and pray to god in thanks that they made it to this oasis.

      • Lenny Hayes for PMMEMBER

        Punters from third world markets can just as easily access credit to pay for their courses as Aussies can for their houses.

        Who is going to check whether they have the full whack of cash to cover their course and living costs for 3 years (rhetorical question) ?.

      • drsmithyMEMBER

        I never said they are slum dogs. I just say that where they come from is a shthole. Australia was clearly their best option.

        Being reasonably well off in a shithole can still mean a comfortable lifestyle. There’s a reason lots of not-especially-rich people “retire” to Bali, Thailand, Vietnam, etc.

  7. proofreadersMEMBER

    “They also warn that banks could soon force some borrowers to sell.”

    Banks only screw depositors!!!

    • “Banks only screw depositors!!!”

      Only when times are good. As they say, a drowning man will clutch at a straw.

  8. Just remember kids, negative equity doesn’t account for interest, fees, commissions or stamp duty. All that can put you down 9% even if your house value doesnt go down.

  9. Jumping jack flash

    Negative equity is often portrayed as being the worst thing that could possibly happen.

    Its actually not that bad. The only ones who need to be concerned are banks and investors.

    For the OO it is simply a signal that they paid too much and were rolled by a smooth shyster. Just like if someone pays too much for a car and uses a stack of debt to buy it. They’re still on the hook for the debt but they would have been anyway. It only becomes a question of how much as they kick themselves for being such a fool. It stings but its not the end of the world

    Banks however need to tread very carefully because LVR is the only risk measure they use for their trillions of debt dollars.

    Investors use their properties to actually generate money and if they aren’t then whats the point. The negative equity is pretty bad for them because it obviously means they’re stuck.

    Because banks run the place we are told about what they have to say about stuff even though only banks are banks and we dont really care that much as individuals. For a bank negative equity is a really bad place to be so that’s what we all hear.