Homebuyers who overpaid are well and truly paying the price

New figures that suggest some homeowners are sitting on properties worth less today than what they paid for them, comes as little surprise to those of us who know how property cycles work.

You see, the buying frenzy that often occurs at the peak of the cycle, when increased competition has the effect of pushing prices skyward, sees many people paying more for properties than they should.

Fear takes hold and bidding wars break out at auctions, with would-be purchasers determined not to miss out on that home they simply must have. They look around at the property markets, see the “most desirable” houses being snapped up and don’t want to miss the boat.

Inevitably, this frenzied house price escalation cannot be sustained and we move into the downturn phase of the property cycle as a result. Sometimes external forces like increasing interest rates and economic turmoil help to dissuade potential buyers, at other times it’s simply natural market forces that see conditions soften.

The recent slowdown we’ve witnessed has been caused by a bit of both, but largely all the negative media sentiment about global economic events has seen consumer confidence take a dive and in turn, house values have either stagnated (best-case scenario) or slipped into negative growth (worse case scenario for anyone who bought at the peak of the cycle only a few years ago).

A few years ago, many purchasers borrowed to the hilt in order to secure their own Great Australian Dream; taking on mortgages of up to 95 per cent (and in some cases more), of the value of the property they were already paying an over-inflated price for.

Then the cycle moved on and brought prices down with it.

As a result, 6.4 per cent of homes were valued at less than their purchase price in the three months to December last year. This represents an increase of 1.5 per cent in the number of homeowners in negative equity, meaning their mortgage is higher than the value of their property.

According to figures form RP Data, of this 6.4 per cent, 27 per cent of those who had owned their home for one to two years were living in properties worth less than what they originally paid.

Not surpisingly, in comparison only around 1 per cent of homeowners who bought their house a decade ago, found themselves in the same situation.

RP Data blamed a national decline of house prices, in the order of 5.5 per cent since late 2010, for this increasing negative equity trend.

”Buyers who purchased a home since this time have in many instances seen the value of their home move below their contract price,” the RP Data report said.

Far north Queensland homeowners have been the hardest hit, with around 22 per cent sitting in homes worth less than the price they originally paid, with Sunshine and Gold Coast purchasers not faring much better. About 15 and 19 per cent of property owners respectively have been affected by the downturn in these locations.

This has caused the Reserve Bank to raise concerns regarding the potential for an increase in mortgage delinquencies, with a history of negative equity property owners finding it much tougher to meet their monthly repayments.

If anything, this should act as a warning to potential homebuyers and investors not to get caught out by the fear and greed mentality that largely drives consumer-spending habits in Australia’s property markets.

It illustrates the importance of buying property at the right price and not over-extending when it comes to finance.

Sure saving your pennies and erring on the side of conservatism when it comes to property values might not be as thrilling as jumping in feet first. But when it comes to riding the cyclical real estate roller coaster, the less excitement the better!


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Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au

'Homebuyers who overpaid are well and truly paying the price' have 1 comment


    June 19, 2012 Peter Z

    Absolutely spot on Michael, one of the best recent articles i have read, because it is so true.
    Anyone who bought property in 2008 at the the peak, and is trying to sell now, will be very lucky
    to get their money back at best.


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