The Problem of Australia’s Negative Equity on Real Estate
May 15th, 2012The latest statistical figures from RP Data, a CoreLogic-owned provider of risk management services and investment property information and analytics in Australia and New Zealand, revealed that there is a significant increase in the number of Aussie homeowners who find themselves in negative equity. This means that their properties, as of the time of study, were worth less than their value at the time of purchase.
To illustrate, RP Data’s figures by the end of September 2011 showed that an estimated 4.9% of Australian homes were in negative equity. However, by the end of December 2011, RP Data recorded a whopping 6.4%, revealing that 1.5% more Australian homes suffered a decline in value from their original worth in just about three months.
There was also a decrease in the number of homes with current value that’s more than double their original price (from 43% in September to 42% in December), as well as in the rate of appreciation or value increase of capital city homes (compared with the average of 25% in the last five years towards December 2011). The latter, in fact, is one of the factors that caused the rise in the number of homeowners in negative equity.
This scenario is being interpreted by some as a manifestation of the recession in Australian homeowners’ economy, especially that some of them, in fact, have even incurred home loans higher than the present worth of their properties. It could be considered that this is a reflection of the slump in housing markets since the latter part of 2010, when real estate values fell by about 5.5%.
While this, at first glance, could seem worrisome for property investors, homeowners and other stakeholders in the realm of real estate and property investment, there is actually no need to worry, as the Australian government has already set new laws to protect homeowners from the state of negative equity.
New No-Negative Equity Laws
In order to prevent people from borrowing more than their home’s worth, the Australian government set new laws to ban negative equity debts and compel financial institutions to provide better and more detailed disclosure of their interest rates and other loan information to borrowers. This move was to clean up the country’s $3 billion equity release industry, which has been bugged with dirt from scams and inappropriate lending practices.
The provisions on greater information disclosure are focused on providers of accommodation bond and reverse mortgage loans, requiring them to thoroughly and sufficiently explain to borrowers not just their interest rates, but also the implications of such compounding rates on their financial welfare. They will also be obliged to provide total debt estimates involved in the home equity release product, so the borrower would have an idea on payables to expect.
By enforcing such new laws, homeowners are prohibited from availing of loans more than their property’s worth, thus preventing them from falling into deeper debt. This will also help people make better use of their resources and become more responsible in managing their liabilities and investment properties.
About the Author: Elston Marcelo is a marketing consultant for PureChecks.com, a leading company in the industry of checks. They offer a wide variety of designer checks available for your different needs.
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