ANZ’s 15% home price drop raises the specter of negative equity for recent buyers

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ANZ says it is forecast of a 15% decline in house prices would bring prices back to where they were in February of last year, which could threaten some recent buyers with negative equity.

Since February 2021, just over $10.2 billion in home loans has been made to people with deposits of less than 20%, figures from the Reserve Bank of New Zealand Te Pūtea Matua show.

The last time buyers faced major real estate price drops nationwide was in the wake of the global financial crisis (GFC), said Nick Goodall, head of research at Core Logic.

After that, prices fell 10% nationally and took five years to recover, although some areas took six to seven years to return to their previous highs, he said.

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“Capital growth lagged for a long, long time,” Goodall said.

Negative equity is a term to describe the position homeowners are in when they owe more to their bank than what their home would sell for.

But even if prices fell 15%, the majority of borrowers who bought since February 2021 would avoid it, Goodall said.

“People who bought before November last year will do well. They would have seen growth in the market and will also be held for longer periods of time,” he said.

However, a small number of recent buyers could already have negative equity in areas like Lower Hutt, where prices had fallen sharply in recent months.

Bank data suggests that only about a quarter of their low-deposit borrowers had less than 10% equity at the end of March.

Westpac’s disclosure statement in late March found it had $3 billion in loans to those with 10% to 20% deposits, compared with 1.3 billion in loans to borrowers with less than 10% deposits.

At ANZ, the figures were $4.6 billion and $1.8 billion, respectively.

Miles Workman, senior economist at ANZ, said the 15% forecast represented an average, and if proved correct, some properties would fall by more and others by less.

Last October, Core Logic created a “vulnerability” tracking system to price declines for various parts of the country, based on factors such as how high prices had risen, the strength of regional economies and buyer demand, Goodall said. .

Regions that may be more vulnerable to larger declines include the southern part of the North Island and Hawke’s Bay, he said. Canterbury was probably less vulnerable.

Lower-priced homes had seen the biggest declines to date, he said, as first-time homebuyers and investors pulled out of the market.

Real estate in the $1.5 million to $2 million range would have fared better as a stronger market remained for equity professionals looking to upgrade.

Negative equity can be a psychological blow to a property owner, but Goodall said, “It doesn’t really matter, as long as it’s on paper. The bank will not suddenly look at your valuation and say: ‘You have to top up’.”

Banks have pledged not to demand additional payments or charge borrowers more.

“Keep paying off your mortgage and you’ll be fine. If you keep your job and keep paying your mortgage, the total value of the house doesn’t matter,” Goodall says.

Only people who are forced to sell while having negative equity, perhaps because of a broken relationship, can crystallize a loss, leaving them with a debt to the bank to repay after their property is sold.

Other people who were in negative equity could delay the sale.

“Hopefully someday capital growth will come back,” Goodall said.

Katie Wesney, strategic finance coach at enable.mesaid that when real estate prices failed to rise, homeowners needed debt reduction plans to build equity.

“They really need to have a good, clear strategy for debt reduction because if prices aren’t going up, the only way they can create that equity is to reduce that debt positively,” she said.

As inflation eroded people’s purchasing power, EnableMe’s financial coaches found that there was usually room in household budgets to cut back so people could pay off their mortgage faster.

“There’s generally about 15% of income that slips through the cracks,” she said.

Often that was money spent on food and dining out, but households should also try to increase their income.

“With a full job market, it’s a good time to ask if there’s room to ask for a raise,” she said.