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Negative equity-Whats the big deal?
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ballyharpat wrote: »did you borrow the money to get the stocks? Yes I borrowed to buy about 50% of the stocks, it was an initial investment to buy a bigger house for myself, but stocks were easier than buying a house, and I was told that they would NOT go down in value, they were a sure thing-I was in NY at the time.
Are you still paying off the loss? I am still paying back some of the money I borrowed, but unlike a lot of people that bought houses, I saved for a few years to have some cash to invest, I had no notion of taking a loan for 80/90 or even 100% of the stocks :eek:
Did you actually make any loss on the Investment?obviously I made a loss, I was down 94k in a month, that is about 60%......
sorry, I interpreted your post as you having lost your profit, which obviously isn't the same.....but maybe i picked you up wrong.
In any event, investing in the stock market and buying a house aren't quiet the same. You invested, expecting to make a profit....but clearly even the best stocks fall, plenty of examples. Its far harder to get an example of an Irish crash that wiped 50% of property values.
You seem shocked at borrowing 80/90% of the value? With city prices at 300-500,000 saving more than 60-100,000 would be impossible for most. This post isn't to moralise...its just to follow up with how some might be pissed at the drop, when most weren't investing on the market0 -
NE is not a problem for those who bought a house suitable for their needs in a place they can be economically active, especially when most of those people have trackers so are probably paying less monthly than it would cost to rent that house.
It is a problem for the economy if they bought somewhere unsuitable because it seriously affects labour Market mobility.0 -
For me it's not just about NE. It's NE on top of the recession, worried about job, reduction in wages.
I don't have a tracker so my mortgage went up by €60 a month this month. That's a fair dent in the yearly wages. My house is worth (on paper) €150K less than when I bought it. Probably worth less than that if I tried to sell it.
So I can't sell my house to get something cheaper. I just have to pay it off or keep paying until I can sell it and have enough left to get a cheaper house.
I've had a pay reduction and my missus lost her job and is having no joy getting a new one. I'm meeting the mortgage repayments and will continue to do so but there isn't much left over for anything extra. We don't go out anymore, holidays are off the agenda and any stuff like car / household goods are being used until they break beyond repair and may not be replaced then.
If negative equity wasn't in the mix we would sell up and move to something cheaper.
I'm not complaining or looking for handouts. I like where we're living. Its just tight at the moment and will be for the foreseeable future.
I know a few guys in similar situations. I suppose if you multiply my experience by a few thousand you can see how the economy is affected. We have this millstone around our necks and as long as it's there it has priority. I know the high horse brigade will say this is our own fault. It is. But the results of this negative equity affect the country and will continue to do so for a long time yet.0 -
NE was always mentioned in debates, TV discussions, radio shows wtc, but I never once heard anyone say that its not a problem if the mortgage can be repaid ok. It was always thrown into the chat as it, by itself, it was the main problem.
It is only a problem if you are planning to sell up, or if you can't make the repayments on your mortgage and there was the chance of the house being repossessed, which in Ireland up to now has been close to nil.
So for a lot of people, its a problem as its a major dent to their pride as they bought as asset that they thought could only ever accumulate value, but it backfired.0 -
NE was always mentioned in debates, TV discussions, radio shows wtc, but I never once heard anyone say that its not a problem if the mortgage can be repaid ok. It was always thrown into the chat as it, by itself, it was the main problem.
It is only a problem if you are planning to sell up, or if you can't make the repayments on your mortgage and there was the chance of the house being repossessed, which in Ireland up to now has been close to nil.
So for a lot of people, its a problem as its a major dent to their pride as they bought as asset that they thought could only ever accumulate value, but it backfired.
NIMAN it is not just an issue if you sell. like a previous poster said he is finding the repayments impossible and cannot sell and move on. There is also the issue that some people bought houses that have a long commute to work as the could not afford houses in or around Dublin especially. Since then car fuel prices have doubled. These people also find that they cannot sell even though they may be meeting the repayments with or without a struggle. There seems to be some posters that take the attitude ''it didn't happen to me because I knew better''.
Maybe they did or maybe they were lucky. However some of the present owners had waited 2-3 years saving and were finding that house prices were climbing10-20% every year. Remember the talk in the papers about the housing ladder. I do not think that some of these owners should get a free ride but I can understand the issue's involved they are more complex than you think.0 -
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But if you have no genuine need to sell - does it really matter?
Or is it just a very expensive lesson to be learned about considering your future needs and abilities instead of making decisions based on immediate requirements.0 -
I know a few guys in similar situations. I suppose if you multiply my experience by a few thousand you can see how the economy is affected. We have this millstone around our necks and as long as it's there it has priority. I know the high horse brigade will say this is our own fault. It is. But the results of this negative equity affect the country and will continue to do so for a long time yet.
Your problem is not the negative equity as per se, its your household employment situation which has resulted in things being financially tight. Talk to your bank to come to an arrangement on repayments.0 -
Farmer Pudsey wrote: »NIMAN it is not just an issue if you sell. like a previous poster said he is finding the repayments impossible and cannot sell and move on. There is also the issue that some people bought houses that have a long commute to work as the could not afford houses in or around Dublin especially. Since then car fuel prices have doubled. These people also find that they cannot sell even though they may be meeting the repayments with or without a struggle. There seems to be some posters that take the attitude ''it didn't happen to me because I knew better''.
Maybe they did or maybe they were lucky. However some of the present owners had waited 2-3 years saving and were finding that house prices were climbing10-20% every year. Remember the talk in the papers about the housing ladder. I do not think that some of these owners should get a free ride but I can understand the issue's involved they are more complex than you think.
Thats what I said, its a problem is you are trying to sell or can't make repayments on your mortgage.
NE is not an issue if you intend staying in your house and can make your repayments ok.0 -
Your problem is not the negative equity as per se, its your household employment situation which has resulted in things being financially tight. Talk to your bank to come to an arrangement on repayments.
This is the issue that a good percentage that cannot pay loans are in. NE compounds the issue by not allowing them to sell up and change there outgoings. timetogo has the issue that he is not on a tracker and has seen his payments be about twice a tracker I imagine. Even if the bank changes payments amouts he still has the issue that even if his circumstances change he is still in an unaffordable situtation. The reality is that this is a two way issue in that the banks over lent and some people over borrowed.
In timetogo's case he may never be able to save to put kids through college, afford to pay into pension plan(not that I would encourage anyone to pay into one the way they work in Ireland). He is at the stage that he is priotising house repayments over other household expenses. You can do this for 2-5 years afer that if you cannot see an exit some sort of insolvency plan is needed0 -
Even with no change in the mortgage holder's ability to pay and no need to sell, negative equity still impacts individual behaviour and the economy through the wealth effect. People have a higher propensity to spend when they feel that they are better off and spend less when they feel poorer. This is regardless of changes in their disposable income and ability to spend. Domestic consumer demand is a huge driver of economic growth and it's suppression as a result of the huge amounts of negative equity in the economy is impacting the potential recovery.
If people are basing their spending on feelings be it feeling poor or wealthy it might not be a bad thing for them to be discouraged from spending, surely people should be spending based on their actual financial situation and not feelings. Spending on feeling is probably what got them into a negative equity situation in the first place.
People spending money they dont have wont do the economy any good either.0 -
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Farmer Pudsey wrote: »This is the issue that a good percentage that cannot pay loans are in. NE compounds the issue by not allowing them to sell up and change there outgoings. timetogo has the issue that he is not on a tracker and has seen his payments be about twice a tracker I imagine. Even if the bank changes payments amouts he still has the issue that even if his circumstances change he is still in an unaffordable situtation. The reality is that this is a two way issue in that the banks over lent and some people over borrowed.
In timetogo's case he may never be able to save to put kids through college, afford to pay into pension plan(not that I would encourage anyone to pay into one the way they work in Ireland). He is at the stage that he is priotising house repayments over other household expenses. You can do this for 2-5 years afer that if you cannot see an exit some sort of insolvency plan is needed
If the poster was in positive equity(market went the other way), how can the poster sell up and buy again?
A bank would not touch him with another mortgage due to the ongoing employment situation.
Considering the poster may have bought a property at 300k, you'll be looking at properties perhaps in the 450k range which means a positive equity of 150k if the market went the other way(forever rising prices). No mortgage possible based on earnings.
The other way is social welfare(Rent Supplement) but immediate disqualification because the husband works. Last option is split up and move back with their parents.
Out of all this it is preferable firstly to make an arrangement with the bank as the family's circumstances can change within a few years(new job). They can keep the house on reduced earnings as long as repayments are made.0 -
If people are basing their spending on feelings be it feeling poor or wealthy it might not be a bad thing for them to be discouraged from spending, surely people should be spending based on their actual financial situation and not feelings. Spending on feeling is probably what got them into a negative equity situation in the first place.
People spending money they dont have wont do the economy any good either.
People almost always base economic decisions on feelings, that's why us economists call it consumer sentiment and business sentiment.* The wealth effect has an impact even when people do have money, even with high levels of disposable income, people with less equity in their homes feel poorer (it doesn't have to be negative although the effect is more pronounced when equity turns negative) and spend less. Consumer spending is a large driver of economic growth, ideally in the current situation those who have disposable income should spend it, negative equity reduces their propensity to do so.
* Thinking, Fast and Slow by Daniel Kahneman is just one of a series of books explaining how we actually make decisions rather then how a rational actor might make decisions. It's an interesting read.0 -
If the poster was in positive equity(market went the other way), how can the poster sell up and buy again?
A bank would not touch him with another mortgage due to the ongoing employment situation.
Considering the poster may have bought a property at 300k, you'll be looking at properties perhaps in the 450k range which means a positive equity of 150k if the market went the other way(forever rising prices). No mortgage possible based on earnings..
Perhaps he has a large detached 5 bedroom in a desirable neighbourhood and could take his equity and downsize to a 2 or 3 bed terrace. He has an income it's just a stretch for his current payments. He wouldn't necessarily be a bad credit risk on a smaller loan amount.0 -
People almost always base economic decisions on feelings, that's why us economists call it consumer sentiment and business sentiment.* The wealth effect has an impact even when people do have money, even with high levels of disposable income, people with less equity in their homes feel poorer (it doesn't have to be negative although the effect is more pronounced when equity turns negative) and spend less. Consumer spending is a large driver of economic growth, ideally in the current situation those who have disposable income should spend it, negative equity reduces their propensity to do so.
* Thinking, Fast and Slow by Daniel Kahneman is just one of a series of books explaining how we actually make decisions rather then how a rational actor might make decisions. It's an interesting read.
How we actually make decisions rather than how a rational actor might make decisions is exactly my point, people making rash decisions is what got them into NE in the first place, I said if they can be discouraged from making more rash decisions it would be better for everyone.
I always base my economic decisions on my financial situation and affordability and by using some common sense, for example if I want to buy something I save for it and buy it. I dont stick it on my Credit Card and pretend to myself I will pay for it later.
I certainly didnt purchase a house I could never hope to afford and base my decision on what level of mortgage I wanted on one years income in the height of an economic boom.0 -
Perhaps he has a large detached 5 bedroom in a desirable neighbourhood and could take his equity and downsize to a 2 or 3 bed terrace. He has an income it's just a stretch for his current payments. He wouldn't necessarily be a bad credit risk on a smaller loan amount.
No matter how small that loan is, the poster has a dependent which will act against him in a loan application.(nevermind any kids). Cash buyer maybe, if the poster gave us more details it would help.0 -
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Peanut2011 wrote: »The issue is not just when you "DECIDE" to sell. The issue is around the fact that these mortgages were taken out and houses are secured on the mortgage. Meaning if you don't pay your mortgage Bank takes the house.
Now I have no problem with that scenario.
The problem however starts when the person CAN'T (opposed to won't) pay the mortgage any more (lost the job, reduced income .....). He starts accumulating interest and the loan keeps getting bigger. In ideal world, the bank would take the house and that would be it.
Unfortunately with the negative equity, let's say you still owe €250k on the house and that house is now sold by the Bank for €90k, you the person that no longer has the house still has a debt of €160k....
That is the issue with negative equity for consumer.
The issue for the banks is that their books will say they have assets worth XXX but the actual worth now is YYY... Meaning when the mortgage was taken out, their books would have said they have a house worth €300k secured against the mortgage of €270k, which would mean if the mortgage is not paid, they can sell and cover the loan, however instead now, that house is worth €90k and secured against loan of €250k...
If person goes bankrupt or what ever bank will need to find the extra €160k to cover their books. Now multiply that by however many negative equity mortgages that really never have any hope or paying it in full!
That is the problem!!
Exactly that.
Bar those case where people are stymied with personal situations like break-ups, need to upscale etc it's the banks that are in trouble here. The collateral doesn't cover the mortgage as a security anymore so the banks risk has gone through the roof.0 -
My sister in law bought a two bed apartment at the height of the market. Now she is starting to have a family with one kid, which is ok, but if she had another of a different sex then the negative equity becomes a big problem.
Their plan though is if that happens they will have to rent out a house and rent out their apartment.0 -
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jimmycrackcorm wrote: »My sister in law bought a two bed apartment at the height of the market. Now she is starting to have a family with one kid, which is ok, but if she had another of a different sex then the negative equity becomes a big problem.
Their plan though is if that happens they will have to rent out a house and rent out their apartment.
There's nothing wrong with having young brothers and sisters share a room.0 -
ITS a problem, if a young couple bought a 1 bed apartment,for 230,
its now worth 110k.
IF they want to have kids, the,ll have to rent the apartment, and rent a house.
And the,y have to pay tax on the rental income.
People bought houses,in the boom, they never expected the value to fall by
50- 60 per cent.
IF people are put off having children, eventually it has a negative effect on the economy.
Negative equity ,means people can,t sell up, move to an area that have jobs.
And now we have the ridiculous situation where ,the hse is helping some people,
pay a 140k, mortgage ,on a house thats worth 75k.0 -
I bought a 3 bed semi in 2007 and returned home from the u.k. I worked extremely hard for my deposit, I paid €275000 at the time. There s no off street lights and now I can buy the house beside for €60000. Why bother anymore.0
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ITS a bad situation, but most people who are in negative equity bought houses in finished estates.
so you bought at the peak, prices started to fall in 2008.
People who bought in unfinished estates should get an extra tax credit.
How much would it cost to put up streetlights, maybe 10k?
maybe the residents group should ask the council to do this first.0 -
It's a problem if you bought a house that met your needs at the time, but you now want to trade up to one that fits your growing family. However bank won't deal with you unless you can produce cash to cover the negative equity.jimmycrackcorm wrote: »My sister in law bought a two bed apartment at the height of the market. Now she is starting to have a family with one kid, which is ok, but if she had another of a different sex then the negative equity becomes a big problem.
Where does family planning come into this?
I mean surely before someone decides to start a family they should take stock of how practical that really is - especially in an economic climate of uncertainty, increasing taxes and reduced services/benefits, unemployment and so on.
To me that would include questions like..
- Can we afford this? If one partner gives up their job to raise the child, can we manage on the other income or can we afford child care if we both continue to work? How secure are our jobs? What if one or both of us were laid off?
- Have we the necessary support to help if needed? (friends/family/daycare)
- Is our house/apartment big enough or suitable for a baby?
.. to name just a few. If the answers to these aren't positive well then maybe it's worth reconsidering or delaying the decision to start a family after all.
That might not be "romantic" but considering how unemployed single mothers are castigated on forums like this for having lots of kids that the taxpayer then has to support through increased benefits, housing etc, it's worth noting that the same principle applies.0 -
The problem is not the negative equity itself, but the circumstances under which people took on debts.y0ssar1an22 wrote: »I just dont understand this at all. I mean, for years people have been (being?) taking out loans to buy cars for 30k or whatever, knowing it will immediatlely drop in value. No big deal. Why the big deal when the same happens with houses? I know the sums of money are larger, but the principle is the same.
Someone with a stable job and affordable mortgage, who bought in 2007 will be in serious negative equity by now. However, if their intention was that they would leave the home 'feet first', then it's not a big deal. Sure, that it may have lost anything between 40% and 80% of it's value will grate, but ultimately they'll get that back in time, even if it takes thirty years.
One of the biggest issues though, which often does not seem to get discussed, is the circumstances behind many mortgages and this makes a lot more difference than any negative equity.
For a start people stretched how much they borrowed to the limit; 100% plus mortgages started appearing and people took them. Even lower mortgages were often at the limit of what people could afford - during a boom economy.
And this stretching is important, because it presumed that they would always be able to afford the investment. They would never lose their jobs. Their pay would never stagnate or drop. Taxes would never increase. Neither would the cost of living.
And this is a logic I always thought insane. You get a mortgage with a lifespan of 20 years and presume that things will not change. Think about it; you buy in 2007 and your income and expenditure will either remain the same or improve up until you pay it off in 2027.
But 20 years is a long time; for example what was the economy like 20 years prior to 2007, in 1987? Higher unemployment than now, one in three emigrating, significantly higher taxes. And it occurred to no one taking out these loans that we could never return to those days? In fact we've not - for all the complaints, we're actually better off than in 1987.
So the trouble that many are in aren't really down to negative equity, from what I can see. They're ultimately down to the fact that they couldn't afford the long term mortgages they took in the first place.
The irony is that if you're seeking trade up, you're better off now than during the bubble.It's a problem if you bought a house that met your needs at the time, but you now want to trade up to one that fits your growing family. However bank won't deal with you unless you can produce cash to cover the negative equity.
Consider doing so during the bubble, from a small apartment, valued at €300k, to a house, valued at €600k; cost of doing so to you is €300k. Now consider you buy the apartment during the bubble and seek to trade up to the house after the bubble bursts and values drop by 50%. Your apartment is now in negative equity to the tune of €150k, yet the house is now valued at €300k; cost of trading up to you has dropped to €150k.
Now this does not guarantee that you'll get a bank to agree to give you a new mortgage, as your ability to pay that may also have changed. However, technically, even though you've lost money on the smaller property, you're overall better off now when trading up than you were during the bubble.
Borrowing or using credit is not always a bad thing. However, forgetting that loans must be repaid, that in doing so you are tying yourself into repayments that you need to be sure you can afford in the future or that it may not make financal sense to borrow in the first place, is.I always base my economic decisions on my financial situation and affordability and by using some common sense, for example if I want to buy something I save for it and buy it. I dont stick it on my Credit Card and pretend to myself I will pay for it later.0 -
The Corinthian wrote: »The irony is that if you're seeking trade up, you're better off now than during the bubble.
Consider doing so during the bubble, from a small apartment, valued at €300k, to a house, valued at €600k; cost of doing so to you is €300k. Now consider you buy the apartment during the bubble and seek to trade up to the house after the bubble bursts and values drop by 50%. Your apartment is now in negative equity to the tune of €150k, yet the house is now valued at €300k; cost of trading up to you has dropped to €150k.
Now this does not guarantee that you'll get a bank to agree to give you a new mortgage, as your ability to pay that may also have changed. However, technically, even though you've lost money on the smaller property, you're overall better off now when trading up than you were during the bubble.
I'd calculate the cost of trading up to still be €300k, the hypothetical owner needs to pay off €150k of negative equity and the come up with a further €150k to move to the larger property.0 -
Not really. You're selling your apartment for €150k, thus still owe the bank €150k (as you can only repay half of the €300k) and bought the house for €300k. Total mortgage is now €450k.I'd calculate the cost of trading up to still be €300k, the hypothetical owner needs to pay off €150k of negative equity and the come up with a further €150k to move to the larger property.
Had the bubble not burst, you'd have sold your apartment for €300, owed the bank nothing (but repaid the €300k) and bought the house for €600k. Total mortgage is now €600k.
Now, of course the above model is very simplistic; it ignores fees, payments and interest. It presumes that the price of your apartment has remained static between purchase and sale (although the price of the house would have also kept up with such price changes). And that price drops were a uniform 50%.
Importantly it presumes that a bank would not demand you clear your initial mortgage before getting a new one. Given this, if they did, it would have more to do with your perceived ability to afford a greater mortgage than any negative equity.
Overall, the point is that when trading up, the drop in value on a larger property is going to be greater than on a smaller one. As such, I've known people (with stable, well paying jobs) who have openly admitted that they're ironically better off trading up now than they were prior to the bubble bursting. And they have.0 -
Kaiser2000 wrote: »Where does family planning come into this?
I mean surely before someone decides to start a family they should take stock of how practical that really is - especially in an economic climate of uncertainty, increasing taxes and reduced services/benefits, unemployment and so on.
To me that would include questions like..
- Can we afford this? If one partner gives up their job to raise the child, can we manage on the other income or can we afford child care if we both continue to work? How secure are our jobs? What if one or both of us were laid off?
- Have we the necessary support to help if needed? (friends/family/daycare)
- Is our house/apartment big enough or suitable for a baby?
.. to name just a few. If the answers to these aren't positive well then maybe it's worth reconsidering or delaying the decision to start a family after all.
That might not be "romantic" but considering how unemployed single mothers are castigated on forums like this for having lots of kids that the taxpayer then has to support through increased benefits, housing etc, it's worth noting that the same principle applies.
Well the problem is that, in this case all those other conditions were considered, the one unforeseen was the Negative Equity possibility when purchasing. I don't think many people foresaw that...
Another purchaser mentioned about young siblings sharing a room, which is fine, but I cannot imagine negative equity disappearing by the time an kid being born now becoming a teenager.
Anyway the point is: NE is a problem in some cases.0 -
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jimmycrackcorm wrote: »Another purchaser mentioned about young siblings sharing a room, which is fine, but I cannot imagine negative equity disappearing by the time an kid being born now becoming a teenager.
It depends how long the mortgage was for. If the principal was borrowed over 20 years by the end of year 14 about 60% of the principal would be paid back, that means unless the property is still 60% below it's purchase price (assuming no down payment; a 100% mortgage) there would be positive equity in the apartment.
Remember that negative equity means the principle owing on the mortgage is greater than the value of the property, not that the property is worth less than was paid for it. A property can worth less than it's purchase price and not be in negative equity, for example, if the buyers upgraded from a smaller place during the boom and used the realised equity from their first property as a deposit on the second property.0
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