Should we be worried about negative equity? 

As seen in The West Real Estate

Perth’s market is easing, and some east coast markets have seen prices decline over the past month. This has already raised concerns about negative equity.

Negative equity means the mortgage on a property is greater than the property’s market value. It can occur when prices decline after a period of growth.

It means, if you sold, you would be unable to recoup enough funds to pay off the mortgage. This leads people to being trapped in what’s often called ‘mortgage’ prison – they can’t sell. It is also very difficult to refinance your loan if you need to. Many people who bought or built just before WA’s last property downturn, found themselves in negative equity. 

Negative equity is a possibility in some east coast markets, particularly for those first home buyers that took advantage of the Federal Government’s 5% Deposit Scheme. But should we be worried in WA?

At this stage, no. While price growth is expected to slow in the coming months, we are not at risk of a significant decline. WA property prices are currently being supported by ongoing demand, low new supply, and a strong economy. This is expected to continue.

But what if prices do fall and I go into negative equity? 

As with shares, a loss is only on paper until you sell. If you have bought a home, even at the peak of the market, and intend to live in it for some time, it doesn’t matter if prices fluctuate. Prices generally trend upward over the longer term so when you eventually decide to sell you should have seen some growth.

If you bought just before a decline, and the value of your property falls, you may experience some difficulty if you need to sell the home fairly soon after purchasing it. You may still see some capital growth, depending on where in the market cycle you bought the property.

If you find yourself in this situation, can you wait until the market improves? If so, work to pay down your mortgage and build equity that way. If you do need to sell urgently, speak to your REIWA agent about the best strategy to maximise your price.

What do the market changes mean for those of us with mortgages? Even though we are currently in no danger of a significant downturn, history shows there will come a time when prices decline. My advice is, never miss an opportunity to work on your bottom line. Pay more off your mortgage at every opportunity, even if it’s just an extra $10 per week, and build up some equity in your home.

Suzanne Brown
REIWA President

Originally published by The West Real Estate, see thewest.com.au. Access may require a subscription.