What the negative equity trend means for our property markets

Borrowing to the hilt to buy your home may have been a reasonably safe bet ten years ago when property prices were on a steep upward trajectory. But in today’s flat market, where house prices are either stagnating in some areas and falling others, it’s a much riskier proposition that could see you owe more than you own.

According to a report in the Sydney Morning Herald, one in fifty households have found themselves in a position of negative equity. In other words, their homes are worth less than the size of their mortgage.

And given the outlook for Australia’s property markets over the coming year is not much rosier than what we saw in 2011, the number of homeowners in this position could swell over 2012.

Estimates suggest that Western Australia and Queensland have the most households in this precarious position, with 4.5 per cent and 3.2 per cent of households respectively being in a position of negative equity.

They are followed by South Australia, where 2.1 per cent of households are “under water” on their mortgages, Tasmania at 1.5 per cent, Victoria at 1.2 per cent and faring slightly better is New South Wales with only 1 per cent.

What this means for our markets?

Concerns have been raised regarding the potential negative impact the emergence of a sector of the housing market “under water” on their mortgages may have.

Given that potential borrowers are already “edgy” and holding off entering the markets and that our housing markets are vulnerable to sudden shifts in local economic or consumer conditions; experts suggest forced sales at this point would not only make a considerable dent in household wealth, but resulting further drops in property prices would scare investors out of the market.

Principal research fellow at the National Centre for Social and Economic Modelling,  Ben Philips, was involved in the analysis that uncovered 60,000 Australian households with negative equity.

“The prospect of negative returns will certainly detract from sentiment through 2012,” said Mr Phillips.

The good news

The good news is that Australian households have coped better with the rising cost of living than most other countries, even as housing affordability threatens to hit an all time low.

Ratings agency Fitch reports that late payments on residential mortgages actually fell to 1.42 per cent of all loans in September, down from 1.77 per cent in March 2011.

And it’s anticipated that the Reserve Bank’s recent rate cuts will help to ease further pressure on households struggling to meet their monthly mortgage commitments, with market predictions for up to five more 25 basis-point cuts to come by June.

But back to the problem at hand; households who currently owe more than they own.

How bad is it?

Last year ended with RP Data  reporting Australian property values falling 4 per cent nationally for 2011.

Some markets fell more than this with Brisbane and Melbourne experiencing a 7.5 per cent and 5.8 per cent market value decline respectively with the more expensive end of the market suffering most.

It looks like we have now entered into the stabilization phase of the property cycle in most markets, so prices are unlikely to fall significantly further.

Of course different segments of the market will respond differently this year.

  • The established home market is likely to perform better than other sectors
  • The first home buyer’s market  is seeing a resurgence of interest, but is going to be very interest rate sensitive
  • The investor market (off the plan, mining towns, etc)  is likely to remain subdued until general market confidence returns
  • The top end of the market is likely to remain flat or fall a little further until our economy and the share market picks up



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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

'What the negative equity trend means for our property markets' have 9 comments


    February 20, 2012 vasilija wilson

    Thank you Micheal
    Every time I get your email re properties I read it with great pleasure and sharing this info with my friends too.
    I learn so much from you and I am thankful to you



    February 20, 2012 Ray Searles

    Micheal could you please lets us know who in the market is predicting up to five more 25 basis- points
    cuts by June, when they could’nt predict no change in the rate last month?
    Regards Ray


      Michael Yardney

      February 20, 2012 Michael Yardney

      The forecasts I’ve read from the various banks over the last few days all suggest one or two more rate cuts this year. Have you watched this video from Bill Evans of Westpac?



    February 20, 2012 Stiven Denkovski

    A1 content Michael, especially : 1- In other words their homes are worth less than the size of the mortgage 2- Housing markets are vulnerable to sudden shifts in local economic or consumer conditions 3- Stabilization phase of the property cycle. (Author “Michael Yardney”) Found the content of high value and excellent knowledge transfer. I would like to comment on something, I hope it brings value to you and your businesses, when reading articles I like articles no longer than 500 words on each topic, reasons being so much on the market, if it’s to long I avoid it, short is better than long. I hope my views,and opinions, help.



    February 20, 2012 opinder singh

    Dear Michael Very informative substantial and clear view of how things are….
    just great..thanks Michael ur positive attitude and approach towards life n things keep me motivating..



    February 20, 2012 Catherine Cashmore

    Your dot points are spot on Michael – keep the informative reports coming..



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