Negative equity-Whats the big deal?

y0ssar1an22 · 03-04-2013 04:56PM #1

Hello everyone. I'm new to boards.ie, so I hope this thread is in the right place and it is not a dupllicate of an existing thread.

Anyway...
Every time you watch the news, or read the paper, or whatever; they are always talking about neg equity and how big of a problem it is.

I dont understand this at all. I buy a house for 500k and it is now valued at 300k. Why do I care? When I bought it I agreed the house was worth 500k (obviously), otherwise I would not have bought it. I accepted the mortgage repayments on a house worth 500k. Why does ot matter that the market value has dropped? In my mind (the purchaser) the house is worth 500k.

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.

Thanks

Corkbah · 03-04-2013 05:02PM

its only an issue when you try to sell the house, if you purchased at 500K and after 5yrs its worth 250K and you try to sell ...if you get the full price 250K, you'll still have to pay off the remaining 200K which was the original mortgage (assuming you paid 50K in the 5 yrs you owned it.... excluding interest.)

thats why people are annoyed because the banks are still going to make money and are not willing to simply reduce the debt owed if the house is sold after a number of years... I dont own property (couldnt get a mortgage during the boom years)

Head The Wall · 03-04-2013 05:11PM

Why should the bank reduce the debt? Does a garage give you the loan value of a car on trade in or what the market value of the car is

Call me Al · 03-04-2013 05:18PM

As well as the inability to move house with a huge noose of debt, LTV ratio is also an issue when it comes to renegotiating the interest rates on some mortgage types.

Peckham · 03-04-2013 05:19PM

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.

hmmm · 03-04-2013 07:59PM

y0ssar1an22 wrote: »

Why the big deal when the same happens with houses? I know the sums of money are larger, but the principle is the same.

Because an awful lot of people saw property as a one way bet, and they are now hoping to whip up a bandwagon where the taxpayer pays them for their loss.

People lost money on pensions and didn't look for the taxpayer to compensate them.
People lost their jobs and didn't look for the taxpayer to pay their old wages.
People lost money on bank shares and aren't looking for the taxpayer to pay their losses.

Yet somehow, property is a magic asset in Ireland, where you get to keep the profits, but the taxpayer is expected to pay for your losses.

Greenmachine · 03-04-2013 08:04PM

hmmm wrote: »

Because an awful lot of people saw property as a one way bet, and they are now hoping to whip up a bandwagon where the taxpayer pays them for their loss.

People lost money on pensions and didn't look for the taxpayer to compensate them.
People lost their jobs and didn't look for the taxpayer to pay their old wages.
People lost money on bank shares and aren't looking for the taxpayer to pay their losses.

Yet somehow, property is a magic asset in Ireland, where you get to keep the profits, but the taxpayer is expected to pay for your losses.

Share holder were paid for their shares, so no. State should have paid zero for each share and claimed ownership of the bank. Simples.

Dicky Pride · 03-04-2013 08:06PM

Also, it's kind of annoying when you pay 250k for a house and your new neighbours pay 95k for the exact same property.

hmmm · 03-04-2013 08:08PM

Greenmachine wrote: »

Share holder were paid for their shares, so no. State should have paid zero for each share and claimed ownership of the bank. Simples.

No, no they were not paid.

whatawaster · 03-04-2013 08:10PM

Greenmachine wrote: »

Share holder were paid for their shares, so no. State should have paid zero for each share and claimed ownership of the bank. Simples.

So if the state came in and paid €1 for every house in the country and claimed ownership of those houses you'd consider that the house owners had been paid for their assets?

Fighting Irish · 03-04-2013 08:23PM

Corkbah wrote: »

its only an issue when you try to sell the house, if you purchased at 500K and after 5yrs its worth 250K and you try to sell ...if you get the full price 250K, you'll still have to pay off the remaining 200K which was the original mortgage (assuming you paid 50K in the 5 yrs you owned it.... excluding interest.)

thats why people are annoyed because the banks are still going to make money and are not willing to simply reduce the debt owed if the house is sold after a number of years... I dont own property (couldnt get a mortgage during the boom years)

lol why would they?

carpejugulum · 03-04-2013 08:54PM

It's a problem when you thought you were a clever investor.

Farmer Pudsey · 03-04-2013 09:22PM

Negative equity is only part of the issue, during the boom people borrowed mortgage's over 30 and 40 years when before that 20 was considered a standard mortgage.
They also took out extra on the loan for furnishing the house as well as having excessive other loans. These were taken out when taxes were lower and wages were higher and there was no shortage of employment. all these factors have now changed.

Some of these loans are unsustainable and as we had very poor insolvency legislation this left a serious issue. In a normal economy this could have been worked through faster if proper insolvency had been in place. Also bank as banks over lend compared to borrowers ability to pay. Banks also allowed some investors to borrow on interest only loans on multiple properties. All of this put an unsustainable position in place. Along with this too much property was build and huge excess property banks are in some locations

The inability now to move this property through the system is leading to a situation that even if the banks reposses that the some borrower's will be left with unsustainable debt which they can never pay back.

jester77 · 03-04-2013 10:59PM

Peckham wrote: »

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.

This is where the problem is. If I buy a house for 500k and 10 years later I want to sell and it is only worth 300k, then the banks should allow me to move the mortgage onto the new property. (Obviously taking ability to make repayments into account)

Dicky Pride wrote: »

Also, it's kind of annoying when you pay 250k for a house and your new neighbours pay 95k for the exact same property.

Is it though? If I buy a 2013 car for 50k and in 2015 my neighbour buys the same model from 2013 for 30K, should I really be annoyed that he got it for 20k less

waitingforBB · 04-04-2013 12:10AM

jester77 wrote: »

Is it though? If I buy a 2013 car for 50k and in 2015 my neighbour buys the same model from 2013 for 30K, should I really be annoyed that he got it for 20k less

I think people are pissed that they bought the 07 model for 50K and the neighbour gets the 13 model for 20K :-)

Farmer Pudsey · 04-04-2013 09:53AM

There is a big difference between negative equity on property and a car devaluing by more than you expect. usuall car loans are taken out over 2-5 years and the repayments are a lower percentage of your income, still not nice however you know that at the end of that term you can decide what to do.

With property it is totally different you may be tied to it for 30 yeras still ans see no way out.

donalg1 · 04-04-2013 10:07AM

Like others have said it is only an issue if you want to sell it. Now a lot of people bought houses that were way above what they needed during the boom because it was the "in" thing to do and because their friend bought a lovely fancy new house kitted out with all top quality finishes and furnishings so they wanted it too.

So now they are annoyed because the value of their lovely shiny house has dropped instead of going up, many others bought houses with a view to selling them on in a few years and upgrading to a bigger house or whatever, with the idea of the house being worth infinitely more further down the line. However, what happened was the reverse the property prices fell so now they cant sell their house for a massive profit and are therefore annoyed and want the government/banks to do something about the fact their investment went the wrong way.

Basically they took a risk it didnt work and now they want the banks/government to cover their losses, however they are only losses if they sell the property.

Its like you put a tenner on a horse that is a dead cert to win the race in your opinion and a few others have said the same down the pub, so you think you cant lose, however, the horse does lose so you now go back to the bookies and ask for some sort of return on your €10.

04-04-2013 10:15AM

I have a friend who got her a apartment in 2007, needless to say it is in huge negative equality, she met a guy 3 years ago and now they are getting married he already had a house, she had a tracker mortgage on a very good rate.

She is in the process of renting out her apartment at the moment and is getting enough to cover the mortgage and charged plus about 200 euro a month, she is happy enough with this and realised that by the time she has paid the mortgage off she will most likely have paid twice the price of the asset she has.. however her way of looking at it.. is that she has no choice, she has to live now, and most importantly its not impacting on her financially at the moment.

ardmacha · 04-04-2013 10:19AM

She is in the process of renting out her apartment at the moment and is getting en ought to cover the mortgage

Very unlikely that her tracker covers a situation where she is renting, rather than living, in the apartment. Perhaps she is being less than forthcoming with her bank?

04-04-2013 10:28AM

ardmacha wrote: »

Very unlikely that her tracker covers a situation where she is renting, rather than living, in the apartment. Perhaps she is being less than forthcoming with her bank?

I don't know about that, but I would imagine it is common enought that couples meet and both of them have a property they decside to move in together... if you cant sell what choice do you have but to rent one of he properties out.

Peanut2011 · 04-04-2013 10:39AM

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!!

SBWife · 04-04-2013 10:53AM

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.

hmmm · 04-04-2013 07:58PM

SBWife wrote: »

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.

Taking money out of the taxpayers pocket and giving it to someone in negative equity will make no difference to the economy, there is no extra money created. Who first came up with this stupid notion?

SBWife · 04-04-2013 08:09PM

hmmm wrote: »

Taking money out of the taxpayers pocket and giving it to someone in negative equity will make no difference to the economy, there is no extra money created. Who first came up with this stupid notion?

I'm not suggesting that anyone do this, just explaining another reason why negative equity has an ongoing negative impact on the economy in general. I'd be very much of the alternative routes to growth school, priming the pump won't work in our small open economy, we'll just end up increasing imports along with the deficit.

2moreMinutes · 04-04-2013 09:50PM

hmmm wrote: »

Taking money out of the taxpayers pocket and giving it to someone in negative equity will make no difference to the economy, there is no extra money created. Who first came up with this stupid notion?

I have similar thoughts about those in serious mortgage arrears. If they are already in serious mortgage arrears (and so I assume not making full payments on their mortgages) but yet still not spending money in the local economy or in this infamous hairdressers that all politicians talk about, how is writing off a portion of their mortgage going to create extra cash in their pockets to get their hair done every month?

Going Forward · 04-04-2013 10:17PM

Negative Equity, another one of those snappy financial terms which has become everyday parlance since the bubble burst. Curiously unheard of before.........

It is what it is, a loss on an investment.

NE is not a reason to seek a writedown.

SBWife · 04-04-2013 10:33PM

Going Forward wrote: »

Negative Equity, another one of those snappy financial terms which has become everyday parlance since the bubble burst. Curiously unheard of before.........

It is what it is, a loss on an investment.

NE is not a reason to seek a writedown.

It might not have been bandied around by paddy on the street but it was a well established term prior to the Irish bubble bursting.

It's not simply a loss on investment, it's a situation where the debt associated with an asset is greater than the value of the asset. If you'd bought with cash and your property is worth half what you paid for, there's no negative equity, you'd still have equity equal to the current market value.

Tombo2001 · 04-04-2013 10:39PM

OP

Tell you what to do.....

Buy yourself a house....

Watch it drop in value by two hundred thousand euros.....

and then come back and ask us....

.....how do I get rid of this gut wrenching feeling I have in my stomach first thing in the morning when I wake up and last thing at night before I go to bed.....

.....and experience the pure anger of encountering someone who says to you "whats the big deal buddy?".....

ballyharpat · 04-04-2013 11:02PM

Tombo2001 wrote: »

OP

Tell you what to do.....

Buy yourself a house....

Watch it drop in value by two hundred thousand euros.....

and then come back and ask us....

.....how do I get rid of this gut wrenching feeling I have in my stomach first thing in the morning when I wake up and last thing at night before I go to bed.....

.....and experience the pure anger of encountering someone who says to you "whats the big deal buddy?".....

Just out of curiosity, what feeling was in your gut when you bought the house?

I ask, because I had $150k in stock before the crash in '08, in the space of a month I had only 56k, I had also lost my job........... It wasn't a good feeling.......all my stocks were blue chip stocks that were supposed to go up in value or stay the same

Ryder · 04-04-2013 11:43PM

ballyharpat wrote: »

Just out of curiosity, what feeling was in your gut when you bought the house?

I ask, because I had $150k in stock before the crash in '08, in the space of a month I had only 56k, I had also lost my job........... It wasn't a good feeling.......all my stocks were blue chip stocks that were supposed to go up in value or stay the same

did you borrow the money to get the stocks? Are you still paying off the loss? Did you actually make any loss on the Investment?

ballyharpat · 05-04-2013 12:45AM

Ryder 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%......

Negative equity-Whats the big deal?

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