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The housing crash is plunging more homeowners into negative equity, with their mortgage debt exceeding the value of their property.
Falling values mean New Zealanders who bought property from mid-2006 to the end of last year will be in negative equity now if they put in a deposit of 15 per cent or less, says Chris Eves, property professor at Lincoln University in Christchurch.
This is the most significant scale on which negative equity has struck the country. In previous downturns, those who were caught with negative equity tended to be developers and larger players.
"What we're seeing this time is a lot more mums and dads being hit," says Eves.
"What's changed in this cycle is the number of New Zealanders who have an investment property compared with the number in the last downturn. That percentage has increased significantly."
While there is a lack of data publicly available on the number of New Zealand homeowners in negative equity, it is likely to match the proportion in Britain, which is experiencing a comparable housing slump.
British house prices are down 11.1 per cent from their peak last August, while Barfoot & Thompson figures for July in Auckland, out last week, show its average house price was also down 11.1 per cent from its peak in December last year.
Commentators in both countries are predicting further price drops of as much as 35 per cent. Standard & Poor's analysts say one in seven British homeowners could be in negative equity by next year.
Eves forecasts that, overall, New Zealand house values will slump by 20 per cent - but in more exposed markets, such as investment property, he predicts drops of up to 35 per cent.
More than 60 per cent of those who borrowed money to buy an investment property in the past two to three years using equity in their own home as a deposit will have negative equity in the rental property.
Most of that money went into the apartment market, which is taking the biggest hit now, with these investors facing considerable losses.
Eves points to small apartments in inner-city areas bought by investors last year as falling in value the most.
He says these buyers have typically borrowed 100 per cent of the purchase price, using their homes as security.
"They are looking at losses in equity of 20-30 per cent, so they are definitely in negative-equity positions."
But the problem spans the spectrum of the property market - from low to high end.
Meta Mortgages' Mark Jurgeleit says many ordinary investors around the country are now looking at negative equity in properties they haven't even settled on yet.
Those who bought properties off the plan before the market crashed - often through property marketing companies - must now settle on properties valued at 20-30 per cent less than they sold for before they were built.
"The reality is they will soon have to borrow and hand over money for a property that is worth up to $100,000 less on settlement than they paid," says Jurgeleit.
He says "dubious" marketing was used to take advantage of "naive, unsuspecting people, taking hard-working mums and dads back 20 years because they trusted in supposedly 'independent' valuations commissioned by developers or marketers".
In some cases, property marketing companies led buyers to believe they would arrange for the property to be on-sold before they would have to settle the purchase.
Loose lending criteria by banks during the boom have contributed to the amplified scale of the problem. When prices rise as quickly as they have in the past five years, lending criteria is then stretched.
Lending practices have tightened again but Eves says this is a "horse has bolted" approach, although he acknowledges looser lending was driven by market competition.
"Finance companies were quite happy to lend 100 per cent," he says. "They were quite happy for second mortgages and in a way that drove more traditional lenders to take more risk to compete.
"The finance companies were the ones with the less stringent lending policies than the banks, so they have more exposure to negative equity."
Second-tier lenders took on the borrowers unable to get finance from traditional lenders, and those people are at the greatest risk from negative equity.
"They're the ones we're seeing going down now. It's higher-cost lending anyway, and as these finance companies are wound up, anyone who's borrowed through them may have their mortgage called up."
For those who have borrowed only for their own home, provided they are able to meet their repayments and are not forced to sell, Eves says the bank "won't want to know" about negative equity.
But being in negative equity has practical consequences if they default on repayments and the bank decides to force the issue.
"If they have a negatively geared investment property and they can't meet repayments, that's where they'll suffer," says Eves.
"People may have to downsize their homes and use the equity to pay out the investment property."
He foresees banks soon requiring those buying investment properties to put up 20 per cent deposits - even though they have equity in their own home.
"That is something that definitely was not on the books six to 12 months ago."
Then, banks were allowing those with equity in their own homes to borrow 110 per cent on their investment property purchases to cover legal and other associated costs.
Another consequence of plummeting property prices is that it will become difficult for those rolling off fixed-term mortgages to refinance with another lender - or even their existing one - because they will be required to provide valuations, which are likely to reveal they have slipped into negative equity.
"If they purchased the investment property 12 months ago for $250,000, borrowing 100 per cent and using their home as security, and the market has dropped 20 to 30 per cent, when they go to refinance they find the property is worth only $200,000," Eves says.
"That $50,000 has to be covered somewhere. They can either take equity out of their own home or sell and pay it out."
He says many families will face this situation in the next 12 to 18 months, and those who are coming off fixed-rate mortgages can prepare themselves for higher repayments by reviewing their discretionary spending.
"We're starting to see people do that, with internal and external tourism declining and public transport use increasing."
He advises against cutting out insurances as a way of stretching the family budget.
And he says it is preferable to carry additional interest costs if possible for the next three years than to sell up, as they will be less than the hit people will take from selling their house while the price is low.
"If someone purchased a house for $400,000, and they're looking at a drop in the market of 15 per cent, that's a $60,000 loss - that's a lot of interest.
"So if you can cover the interest you are a lot better off than if you put the place on the market."
The good news is that with finance companies now cleared out of the market, banks are getting more money in deposits than in the past six years.
This means they need to borrow less from overseas to lend out, which will help cap fixed-interest rates.
