Negative equity starts to bite

Negative equity starts to bite for buyers 'flipping' property - AFR, 27th July

"Sydney residential property owners who bought a median-priced home at the peak of the boom could face losses of up to $194,000 – or more than 18 per cent of their purchase price – if they decide to "flip" their asset into a falling market. A Melbourne owner in the same position could lose up to $152,000."

"The impact is being felt across the country. Sam Saliba, a director of cleaning company Command51, says he's facing a paper loss of about 20 per cent on a $500,000 two-bedroom, three-level townhouse in a 12-unit block in Nundah, about eight kilometres north-east of Brisbane."

How much have you lost so far?

What is your exit strategy? At what stage will you stop your loss and sell? -20% -30%?

 

I'm not impacted by negative equity but if I were in that situation I would try and hold the property. Increased interest rates (unlikely for the foreseeable future) and unemployment would be the major concerns of recent purchasers with negative equity.

 

Looks like we are back to 2001? Sydney market flat for a few years.

 

0 loss recent purchases -0/1% older purchases +120%

Seems their is an opinion that everyone bought at peak in 2016/17 which rubbish.

Most investor's have portfolios that range over many years with properties In various stages of growth.

 

No idea. Don't care.

Long term hold

Never. Why sell an income producing asset? Makes no sense.

Property investing is a marathon, not a sprint. Get back to me in 20 years and we will see. That is my investment time frame.

 

For those who have negative equity in Syd and Melb after the recent booms, It's because they made very poor buying decisions. That's all .

What's one person's negative equity is another person's opportunity . All comes back to being educated well from the basics up. Most simply do not take the time to learn the game well.

That's why I love RE. Because I know I can have the edge.

 

It's great to say hold long term and don't worry about it (which is sensible). It can be difficult though, as once you have minimal or negative equity, you can't refinance without kicking in extra cash. Many become mortgage prisoners and have to take whatever rate hikes the bank throws at them. Add this to APRA and royal commission etc, it will be a difficult few years for many property owners who purchases in last few years, trapped in ever more expensive loans and unable move to a lender with a better rate.

 

High risk.
High gain.
High loss.

Opportunity for some one else.

 

While that is true, it's is a choice to run a heavily negatively geared portfolio. Some investors with a heavily negatively geared portfolio will find it harder to hold during a downturn.

Investors with a cashflow positive portfolio won't find it so difficult to hold through a downturn.

 

Why would any sane person even consider "flipping" a negative equity product? why would anyone buy a property last year in Sydney and then flip it now if they know they will make a loss? .

 

I/O Cliff - loan resets to P&I and the investor can't afford the repayments.

 

Sometimes you flip something to get rid of it, not necessarily for a profit, but to cut your losses.

Getting in and out of the housing market is an expensive deal, what with all the fees and taxes, it would be like having a stock broker taking a 10% clip.

It is also intrinsically slow, you do not buy and sell in a day, let alone a second. A friend of mine currently trying to sell, is finding that two of his buyers have pulled out because of the time taken, and the market dropping, has given them the time to reconsider, and work out that they would rather lose their deposit.

Holding on in normal times is the right way to go, as long as you can comfortably manage things, long term hold, as Perth Guy says, unless you thought a major downturn was coming. No one would have wanted to hold a negatively geared property in Japan for the last 30 years for example.

 

CF of portfolio is dynamic, and CF+ property from some day can be CF- (during downturn), similarly when CF- property can become CF+ during boom times, right? It's just a math, it works both way. It just depends on how much prices/rent drop and for how long.

 

Isn't one of the ways to hedge a negative equity property putting the loan on P&I to claw some of the equity back?

I am a long term investor as well, but that doesn't mean I "do nothing" in this situation.

 

Most good investors have that, but sadly, it doesn't represent the majority of investors. The number of investors in the market has rapidly increased. It's gone from 20% of new finance in 2000 to a peak of almost 60% in 2016, and the most rapid increase has been since 2012, with the value of these loans going from $6b to almost $16b in that time. There has been an absolute explosion of new investors entering the market, and I'm sorry to say, a lot of them are very inexperienced and in over their heads. I mean we're seeing an awful lot of silly people come out of the woodwork now, saying "it's all the banks fault I borrowed 20 one bedroom apartments with one 5% deposit I never thought I'd have to pay the principal wah wah wah".

It's not the good investors we have to worry about.

 

Or Perth for the last 6 or so years.

 

A lot of investors didn't know their I/O loans would reset:
Banks moving to tighten lending rules - but it's too late for some

At the peak of this "absolute explosion of new investors", the portion of loans that were I/O exceed 40 per cent! I don't even think the USA had that portion of investors with Condos and OptionARMS before the GFC. They had household debt to income peak at 130% just prior to the subprime collapse. We have household debt at 191% of income. There is a lot to go wrong and go wrong very quickly.