Tens of thousands of property owners face the risk of a credit crunch as they struggle to hold properties that are worth less than their loan, despite the recent record-breaking rise in house prices in Sydney and other capitals.
The most exposed are property owners in inner-city Sydney and Parramatta, areas dominated by high-rise apartments.
More than one in six households (18.2 per cent) in the city and inner south are underwater or in negative equity, analysis by Digital Finance Analytics shows. This means that out of 30,076 mortgaged properties, 5414 apartments and 48 houses were valued lower than the current loan amount as of March 9, 2021.
Owners of such properties would find it difficult to refinance their loans to take advantage of the ultra-low interest rates, as the lower valuations would limit the amount they could borrow.
If they are forced to sell, they might need to tap their other assets to plug the shortfall.
They could, however, hold on to the home until it grows in value, provided they have the capacity to do so.
In the affluent Eastern Sydney suburbs, 16.8 per cent of households owed more than the value of their property; in Parramatta, the figure was higher at 17.7 per cent.
In inner Melbourne, 9096 apartments and 108 houses fell into negative equity, which meant more than one in six households (17 per cent) were holding an underperforming asset.
DFA director Martin North said negative equity continued to increase among high-rise developments in the main centres where prices remained fragile because of excess supply and structural issues.
“High-rise apartments are on the nose, with values falling in many of these areas, thanks to oversupply, flammable cladding, and defects,” he said.
AMP head of investment strategy and chief economist Shane Oliver says the continuing weakness in the apartment sector is also because of low demand caused by the lack of migration as well as changing demographic preferences.
“A lot of it has to do with the pre-pandemic surge in supply in apartments, particularly in Sydney and Melbourne, combined with falling demand due to lack of immigration and a shift in consumer preferences away from apartments,” he said.
Although negative equity broadly eased for house owners, some areas such as the central coast in NSW and Melbourne’s western suburbs were not spared – 1686 and 1063 houses fell into negative equity, respectively.
“There are a lot of cookie-cutter houses on small lots particularly in Point Cook in Melbourne where values have fallen since peaking in 2017. The current rises are small, and there is plenty of supply competing with new house and land packages, thanks to the government stimulus and incentives,” Mr North said.
“As JobKeeper and mortgage repayment holidays end, some will decide to sell into the current rising market. However, those in negative equity cannot refinance or move.”
In Perth, Mandurah was the hardest hit – more than 1 in 10 households have a higher mortgage compared with the value of their homes.
By contrast, strong price growth in Queensland, South Australia and Tasmania means homeowners have enjoyed healthy equity gains and largely managed to stay afloat.
For apartment investors, negative equity is just one part of the problem. They are also losing thousands of dollars in rents each month amid widespread apartment rental vacancies.
Sydney inner-city landlords were the hardest hit, losing an average of $2653 each in February alone, the MCG Quantity Surveyors Rental Loss Index showed.
Investors in the Strathfield, Burwood and Ashfield areas lost $2133 each during the month, and each Parramatta apartment landlord lost an average of $1877.
Overall, Melbourne city investors lost a total of $11.78 million in rents during February, which works out to an average of $1954 in lost rent for each landlord.
“For individual landlords, if they own a property in one of the areas with a high rental loss index, they are at risk of vacancy and there would likely be downward pressure on rents,” said MCG managing director Mike Mortlock.