KEY POINTS:
Negative equity - the worst thing that can happen to property owners - is when the value of the house is less than the mortgage and you are well and truly out the back door.
Some people are already facing negative equity and if property drops further in value, there will be many more in the same leaky boat.
We are only at the start of the property slump.
With property values way out of line with rentals, and a large number of new investors and owners having high debts, I think the slump will last several years in many areas.
So, if your house is worth less than the mortgage, what should you do?
My advice to those struggling to meet mortgage costs, and those who think they might sell in the next few years, is to sell now and take the loss.
New Zealanders do change houses frequently for all sorts of reasons - new partner, job transfers and, at times, just plain boredom.
For those with negative equity I don't think it's a time to hunker down and wait for the house's value to grow.
There is strange belief among some people that selling when you have negative equity creates a loss.
It doesn't - you already have the loss. The loss was made when property values fell. Selling does crystallise the loss, but it does not create the problem.
By hunkering down and holding on, you may make the loss - and your financial problems - worse.
That is, property markets will probably fall further and your loss will increase. Most people are better off taking the loss now rather than holding on and risking a greater loss.
There is another factor that needs to be calculated - at the moment renting is much cheaper than owning.
I have often said renting is the bargain of the decade - the rent you pay for any property is likely to be a lot less than the mortgage interest and other ownership costs you will pay.
Selling up and renting is likely to mean you will have a bigger surplus of income over expenditure.
Selling up and renting will mean your cash flow is much better, allowing you to save and invest much more than you otherwise could. This will, in time, let you get ahead.
Owning up to your loss and selling is not easy but you have to admit - to yourself at least - that you were wrong to buy the property.
You then have to find a buyer in a difficult market and you will also need to deal with a grumpy bank - all quite big hurdles.
However, it is the right thing to do. The alternative is to hold on and, in many regions, watch your negative equity increase.
Simultaneously, you will be shelling out more interest - and rates, insurance and maintenance - than what you could be paying in rent.
To hold on means you are taking a view that property values will recover quickly. That is a big call.
Try to take an honest look at your financial situation. Forget about what you have done and what you paid for the property.
Instead, make a true assessment of what the property is worth and then think of the future. Get some help and advice if you need it.
What you did is history. Learn from it - but then make some plans for a better future.
Each week best-selling financial author Martin Hawes shares his strategies to help you grow your wealth. You can email your personal finance questions to info@wealthcoaches.net or andrea.milner@heraldonsunday.co.nz
