Officially, negative equity is when a property is worth less than the mortgage on that property.
An example would be having a mortgage of $250,000, while only being able to sell your house for $225,000.
Recently though, there appears to have been a redefining of what negative equity is – according to data provider RP Data, it’s when a house is valued less than its purchase price.
One could only speculate on the change of meaning, the cynical might think it’s impossible to measure negative equity on a wide level – who else but you knows your loan balance?
So a new definition is invented, a report can be written on the subject, then a press release issued.
A company then enjoys numerous media mentions – essentially an exercise in marketing!
Now that’s been cleared up, RP Data’s report still has merit in illustrating where housing has gone recently and why housing grants can be a trap for first time buyers.
As of the December 2011 quarter, 6.4% of Australian homes were worth less than the price paid, up from 4.9% in the previous quarter.
Of course this doesn’t take into account stamp duty and other closing costs, so you’d expect the figure to be slightly higher if those were added to the purchase price.
Most of those with houses in this category are those who’ve bought recently.
If they were lured by the doubled first home owner’s grant, they’re less likely to have significant equity built up in the property and more likely to fall prey to true negative equity.
With credit conditions no longer lending themselves to house price gains, those who’ve bought in recent years could find their valuation hovering below their purchase price for some time to come.
That should come as no surprise to those of us with memories stretching past the year 2000.
Peter Mancell is a director of Mancell Financial Group and FYG Planners AFSL/ACL 224543. This information is general in nature and readers should seek professional advice specific to their circumstances. If you want help with your financial future, we’re arguably the best financial advisor in Australia.
