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Opinion
Disclaimer
This article is for general information only.
It should not be taken as professional advice.
There are a lot of articles across the mainstream media at the moment about the housing market. Notably, they focus on how negative equity and mortgagee sales are becoming commonplace.
Well, who would have thought?
One thing I hear a lot is how much money people have “made” in a rising market. What they mean is, they look at homes.co.nz or the rateable value of their property, get the estimated value of their home and see that it is more than what they paid for the house upon purchase. This isn’t the “value” of the asset at all, but it makes people feel rich.
Clever people understand this and continue paying their mortgage down as fast as possible. Others head off to the bank, re-borrow up to the new “value” and go buy a jetski, or a new ute or a boat because they feel rich. They forget that this money still has to be paid back and that house prices won’t continue rising.
Conversely, recently I have been hearing about how much money people have “lost” in a declining market, and how they are panicking. As always, the media have a large part to play in this and there are a number of doom and gloom articles around at the moment. This makes people very nervous, but the question is: what have they “lost”? Taking the example from above, where they have made a gain on paper, it is a similar picture in reverse.
They buy a house for $500k (fantasy, but it’s just an example). A year or two later homes.co.nz tells them it is worth $700k. Is it possible to sell it for that? Maybe, if the market conditions are right and someone really wants that house. But that additional value is only realised when the property is sold and the money is in the bank (less any capital gains tax payable as a result of the brightline test).
But in the end something is only worth what somebody is willing to pay for it.
Bear in mind though that media get paid by clicks, so the more dire or sensational the headline, the more people click on it. The days of balanced, unbiased reporting are long gone.
I hear people saying they have “lost” money. The house still cost $500k to buy, it rose in paper value to $700k according to homes.co.nz, but now it has dropped back to $600k, so in their mind, they have lost $100k.
They haven’t lost anything, but I find that impossible to explain to people whom I once thought were intelligent, so now I don’t bother.
The only time you lose money is if you sell the house for less than the price you paid for it.
Assuming you buy a house as a family home or as an investment, you should look to the long term. Short to medium-term fluctuations like market changes and interest rate movements should have been anticipated and calculated. Banks help do this by stress testing a borrower at a much higher rate of interest than the current rate when you apply for a loan. They do this because many people are not particularly financially astute, despite what they think.
Take the example in the media recently of a Lower Hutt man moaning about how things are hard:
It doesn’t stack up. He would have been stress tested at about 7–8% interest a year ago when he got his loan, so he should be able to cope. His house hasn’t changed, and he hasn’t lost a bedroom from it when the “value” decreased. He is worried about all the wrong things. He states he has the option to go to interest only for a while and has taken on an additional part-time job to help. These are sensible things to do and things that we have had to do in the past, just as our parents did when they were young. So why cry to the media? Would he have been better off staying in his mouldy rental?
Demanding to know what banks’ profit margins are and complaining about them shows his ignorance, as he could have worked the margin out reasonably easily. Banks are a business; they are entitled to make money, as are supermarkets. These articles help explain how banks do it and why.
https://www.bnz.co.nz/personal-banking/life-moments/how-mortgage-rates-are-calculated
https://www.squirrel.co.nz/blogs/housing-market/banking-on-margins
Banks are generally very helpful to borrowers in strife. Investors may be a different story, but banks offer mortgage holidays of up to 6 months and only use mortgagee sales as the last resort. As long as you can service the debt you will be fine.
The key is to communicate with the bank.
Negative equity is nothing to do with the value of the asset, it is to do with the borrowing against the asset. If you look at homes.co.nz or at your rateable value and think you are rich because of the “value” of your home, you are woefully wrong. I checked the homes.co.nz value of my own home today; it has dropped $150k from a week ago (and I only checked it a week ago when trying to make a point to a friend).
As the article below states, negative equity is only a problem if you are forced to sell or refinance your property, or use it as security for another loan. It also points out who is susceptible to negative equity and what you can do to address it. Our man above should read it.
https://www.canstar.co.nz/home-loans/what-is-negative-equity-how-you-can-minimise-it/
Times are tough and about to get much tougher, but if you are sensible and have planned for it, you will survive. Don’t read the doom and gloom in the media (don’t read the mainstream media at all, subscribe to The BFD instead); just look at your own situation and plan accordingly. If you have been sensible and prudent and patient, then you should be fine.
If you haven’t been sensible and prudent, there are already 636 jetskis for sale on TradeMe…
