Hundreds of Wellington first-home buyers who bought at market peak now in negative equity

Hundreds of first-home buyers in Wellington are estimated to now be in negative equity because of persistent price falls across the region, CoreLogic analysis shows.

CoreLogic head of research Nick Goodall said an estimated 34% of first-home buyers who purchased in the capital during the final quarter of 2021 were now in negative equity, with mortgages bigger than their homes were worth.

In Upper Hutt the proportion was 48%, in Lower Hutt it was 43%, and in Porirua it was 31%.

But Goodall said there should not be too much to worry about while the economy and labor market remained solid.

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“I think one of the important things to note here is that just because you’re in negative equity on paper it doesn’t mean the bank will come asking for more money to top up the loan,” he said.

“With long-term growth expected to come back at some stage, and unemployment remaining low, banks and mortgage-holders should be willing and able to hold on through the downturn.”

The analysis assumed a 20% deposit, which most first-home buyers were required to have, that no principal had been paid back, and was calculated by comparing purchase prices to how much homes were worth today.

Nick Goodall, CoreLogic head of research, says while the economy might go into recession it is not expected to cause significant job losses, so most Kiwis will be able to keep up with mortgage repayments.

Nick Goodall, CoreLogic head of research, says while the economy might go into recession it is not expected to cause significant job losses, so most Kiwis will be able to keep up with mortgage repayments.

Goodall said the analysis was relatively simplistic, but the first-home buyer population targeted would likely have only paid down 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.

CoreLogic’s July House Price Index showed homes across the Wellington region were worth less than they were at the same time last year, after average values ​​fell a further 3.6% in July.

The analysis also found some first-home buyers who purchased during the third quarter of 2021 and the first quarter of this year were likely in negative equity, although the ratios were smaller.

For those who bought between January and March this year, 19% of first-home buyers in central Wellington were estimated to be in negative equity.

In Porirua the figure was 12%, Lower Hutt was 13% and Upper Hutt was 10%.

Goodall said prior growth, high first-home buyer presence previously, and stretched affordability were some of the drivers behind Wellington’s price falls.

Living the price fall

Ed Scragg and his wife bought their first home in the northern Wellington suburb of Newlands last August, about two months before the market peaked.

Scragg said the estimated value of their three-bed property initially rose about 15% on Homes.co.nz, but all capital gain had been eroded, and he expected to face a loss if he had to sell today.

Scragg was not overly concerned about the specter of negative equity, because he and his wife had built up a strong deposit over years of hard saving.

They also bought the house as a family home and had no intention to sell, and when the time came, he expected the market to have recovered.

Upper Hutt is estimated to have the highest proportion of first-home buyers who bought during the market peak who are now in negative equity.

Kevin Stent/Stuff

Upper Hutt is estimated to have the highest proportion of first-home buyers who bought during the market peak who are now in negative equity.

Facing higher interest rates

But the couple were facing another difficulty shared by recent buyers country-wide – their one-year fixed rate was about to expire, which was likely to result in the interest they paid on that portion of their mortgage doubling.

Goodall said at the end of June, 45% of mortgages had less than one year to run on their fixed term.

When his one-year rate was renewed, Scragg said there would be belt-tightening required, which meant less eating out and being more choosey at the supermarket.

“You don’t go buying a house without thinking interest rates could go up, and you take confidence from banks having done stress tests,” he said.

Wayne Barton of estate agency Professionals Redcoats says supply is booming in Wainuiomata, with 25 homes on the market during the peak, and 150 for sale today.

Supplied/Stuff

Wayne Barton of estate agency Professionals Redcoats says supply is booming in Wainuiomata, with 25 homes on the market during the peak, and 150 for sale today.

Scragg, who works at Stuff, said he was surprised that the pace interest rates had gone up, and he had expected the market to remain on its upward trajectory for longer than it did.

Back 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 a push to commit than something that led to a rash decision.

Fall may be larger than recorded

Goodall said he has spoken to realtors in the Hutt, who said homes were failing to sell even when priced 20% below peak prices.

If such sellers were taking their properties off the market rather than accepting lower prices, it would not be captured, meaning the true scale of falls might not be reflected in the HPI.

Wayne Barton of estate agency Professionals Redcoats operates in the suburb of Wainuiomata, and said prices had fallen by roughly a fifth in his area as well.

He said during the boom some new builds in a local development were selling for $1.1 million, but the same homes today were going for $920,000, or $180,000 less.

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No longer buying for capital 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 switched to only making offers on properties that would yield at least 12%.

Yield is calculated by annual rent, divided by purchase price.

“I’m purely all about cash flow this year,” he said.

“If you bought a house that was yielding at 5.5% in the middle of the boom, now that property now has to yield at 8 to 8.5% just to break even.”

Achieving this yield meant focusing on blocks of flats or boarding houses.

Goodey said most buyers were not yet accepting how much the market had fallen, which was reflected in the falling rate at which his offers were being accepted.

In the last eight weeks, Goodey said he made roughly 40 offers.

Steve Goodey runs a property coaching business and operates mainly in Wellington.

Supplied

Steve Goodey runs a property coaching business and operates mainly in Wellington.

Four owners had made counter offers that he deemed too high, and he only ended up buying one.

“Everybody’s expectation is they’re going to get the money that was available at the absolute peak of the market.

“That’s not there any more and most people don’t realize how far it’s dropped.”

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