I own a house worth $500,000.
In 5 years thanks to a boom its now worth $1m
The correction finally comes and its now worth $800,000 over following 1-2 years.
Inflation is 2.5%
Q, have I lost or gained money over this time (say 7 years)?
Let's start by defining what some of the official parameters are here - and let's just stick to Melbourne as our example.
Median house prices in Melbourne went from around $550,000 in 2010 to touch $700,000 in 2016, so they really didn't double as you asserted - not on average anyway. The gain was still a rather hefty $150,000 for the average house.
Every year around 85,000 houses and apartments change hands in Melbourne - so in 2015/6 at the peak of the boom there were 170,000 houses and units changing hands at premium prices. Now the official decline since the peak has been 6% but there are individual suburbs and local government areas that have been hit much harder than that - in particular City of Boorandara and City of Stonnington have experienced the worst falls so far and suburbs like Blackburn, St.Kilda, Prahran, Vermont, Clayton etc have had falls of between 15-20%. So the pain is currently confined to the nice parts of the inner and middle ring eastern suburbs so far, not spread evenly across the metro area (yet).
It's the buyers who bought in 2015/16 who are most at risk of negative equity - perhaps 100,000+ households. Even if your house only declined by 10% in those suburbs many people who bought at the peak may find their deposit wiped out and if it keeps going then the losses will probably wipe out all the gains made in the last 7-8 years. There might be something like 200,000 or so households in that boat depending on when they bought and how much irrational exuberance they put into their purchase.
Are you beginning to see why people are slamming their purses and wallets shut now? Technically there's a lot of people paying off mortgages on houses and units that are potentially worth less than they paid for them - and that's a massive problem that will only get worse the longer the slump goes on.
Not just a problem from those households but also for the banks that loaned them the money... and ultimately for all Aussies because the destruction of wealth will completely kill the consumer economy we have now, nobody will have any money to spend. Are you beginning to see why these real estate problems are going to be everyone's problem?
Q3 If I do borrow money to buy a house at the peak and now in negative equity. How much do I need to panic? Yes there are winners and losers in any market, but the govt and banks looks at big picture, not individual.
It's a problem when:
- You don't have a choice about selling into a depressed market (ie divorce, probate, moving interstate etc).
- You try and borrow against the equity in your house
- Or if you're an investor you try and cash in.
People who are heavily leveraged investors are the most exposed to these slumps but they're not in trouble unless they're forced to sell for some reason. But again, sometimes you don't have a choice.
The real problems will emerge if the losses continue to be sustained for the next two or three years and people who are waiting for the market to improve only find it getting worse... what then?