Hundreds of first-time Wellington home buyers who bought at the top of the market now with negative equity
It is estimated that hundreds of first-time home buyers in Wellington are now in a negative equity position due to the continued decline in prices in the area, according to CoreLogic analysis.
CoreLogic head of research Nick Goodall said around 34% of first-time home buyers who bought in the capital in the final quarter of 2021 now had negative equity, with larger mortgages than the value of their home.
In Upper Hutt the proportion was 48%, in Lower Hutt 43% and in Porirua 31%.
But Goodall said not to worry too much as long as the economy and labor market remain strong.
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“I think one of the important things to note here is that just because you have negative equity on paper doesn’t mean the bank will come and ask for more money to complete the loan,” he said. declared.
“With long-term growth expected to return at some point and unemployment remaining low, banks and mortgagers should be willing and able to weather the recession.”
The analysis assumed a 20% down payment, which most first-time home buyers must have, no principal had been paid back, and was calculated by comparing purchase prices to the homes current value.
Goodall said the analysis was relatively simplistic, but the targeted first-time homebuyer population would have likely only repaid about 1% of their loan.
Current values were based on CoreLogic’s automated valuation model, which is often used by banks to estimate a property’s value.
The CoreLogic House Price Index in July showed Wellington-area homes worth less than they were at the same time last year, after average values fell another 3.6% in July.
The analysis also found that some first-time home buyers who bought in the third quarter of 2021 and the first quarter of this year likely had negative equity, although the ratios were lower.
For those who bought between January and March this year, 19% of first-time home buyers in central Wellington are said to have negative equity.
In Porirua the figure was 12%, Lower Hutt was 13% and Upper Hutt was 10%.
Goodall said earlier growth, previously high presence of first-time home buyers and widespread affordability were some of the drivers behind Wellington’s price slump.
Experiencing falling prices
Ed Scragg and his wife bought their first home in the northern Wellington suburb of Newlands last August, around two months before the market peaked.
Scragg said the appraised value of their three-bed property initially rose by around 15% on Homes.co.nz, but any capital gains had been eroded and he expected to take a loss. it was supposed to sell today.
Scragg wasn’t too concerned about the specter of negative equity, as he and his wife had built up a solid deposit over years of strenuous saving.
They also bought the house as a family home and had no intention of selling, and when the time came he expected the market to recover.
Facing higher interest rates
But the couple faced another difficulty shared by recent buyers nationwide – their one-year fixed rate was about to expire, which risked doubling the interest they were paying on this part. of their mortgage.
Goodall said in late June that 45% of mortgages had less than a year to run into their fixed term.
When his one-year rate was renewed, Scragg said he would have to tighten his belt, which meant eating out less and being more selective at the supermarket.
“You don’t buy a house without thinking that interest rates might go up, and you take confidence from banks after doing stress tests,” he said.
Scragg, who works at Stuff, said he was surprised at the pace at which interest rates had risen and expected the market to stay on its upward trajectory longer than it has. do.
In August, Scragg said there was a lot of FOMO (fear of missing out) in the air, but for him and his wife it was more of a push to engage than something that led to a rash decision.
The fall may be greater than that recorded
Goodall said he spoke to real estate agents in the Hutt, who said the homes weren’t selling even though they were priced 20% below peak prices.
If these sellers pulled their properties from the market rather than accepting lower prices, this would not be taken into account, meaning the true extent of the declines might not be reflected in the HPI.
Wayne Barton of estate agency Professionals Redcoats operates in the suburb of Wainuiomata, and said prices had also fallen by around a fifth in his area.
He said during the boom, some new construction in a local development sold for $1.1 million, but the same homes today cost $920,000, which is $180,000 less.
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No longer buy for gain
Property investor Steve Goodey said the Wellington market has changed in more ways than one.
Profit was no longer going to come from capital gains, so Goodey had moved on to only bidding on properties that would return at least 12%.
The yield is calculated according to the annual rent divided by the purchase price.
“I’m purely on cash flow this year,” he said.
“If you bought a house that was earning 5.5% in the middle of the boom, that property now has to earn between 8 and 8.5% just to break even.”
Achieving this yield meant focusing on blocks of flats or boarding houses.
Goodey said most buyers weren’t yet accepting how much the market had fallen, which was reflected in the drop in the rate at which his offers were being accepted.
Over the past eight weeks, Goodey said he made about 40 offers.
Four owners had made counter-offers that he felt were too high, and he ended up buying just one.
“Everyone expects them to get the money that was available at the absolute top of the market.
“It’s not there anymore and most people don’t realize how far it’s gone.”