1 in 5 owes bank more than house is worth

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FALLING HOUSE prices mean one in five homeowners with a mortgage now owes the bank more than their house is worth.

And with a grim economic outlook for 2009 thousands of people are set to lose their jobs and house prices are expected to keep tumbling experts say a cocktail for financial ruin is brewing.

A Lincoln University study has for the first time revealed the extent of the "negative equity" situation when a house is worth less than the mortgage on it. Property studies professor Chris Eves found rapidly declining house prices in the past year meant that 100,000-130,000 households are now in the negative equity zone one in five of the estimated 500,000 New Zealand households with mortgages.

Eves says people who bought homes during the 2006-07 property boom, and have 75%-plus mortgages, fall within the zone of negative equity risk. House prices have fallen 10% in the past year and many commentators are picking a further 30% drop.

To reach his conclusions, Eves tracked houses sold in Christchurch in 2006-07, and their resale values in 2008. Using his findings and data from mortgage lenders he extrapolated to conclude that of the 220,000 houses sold nationwide in the same period, 130,000 had mortgages of 75% or higher big enough to be at risk of negative equity.

While negative equity is less of a worry if you can sit tight in your house, those forced to sell in the current depressed market could face huge losses. Eves says an unwilling seller could lose 30% or more of the price they originally paid for a house.

He recalls a divorcing couple in Christchurch who had to sell the home they had bought in 2006 for $530,000. It sold last month for $420,000. Another house bought for $1,325,000 in April last year was sold in January 2008 for $865,000.

David Tripe, director of Massey University's centre for banking studies, says banks are generally content to allow householders to live with negative equity, as long as mortgage payments are being made.

But with unemployment set to swell in the next year, tens of thousands now face financial strife.

"It's my impression that we're going to see a significant rise in unemployment in the short term, because the vague hope that the Christmas period would solve everyone's problems isn't going to eventuate," says Tripe.

This makes negative equity borrowers especially vulnerable.

"If unemployment suddenly went up to 10%, or finance companies started calling in loans, then these people [with large mortgages] would certainly be in a negative equity position, and we would see banks pushing sales," says Eves.

Unemployment sits at 4.2%, or 94,000, but the worst-case Treasury scenario has another 110,000 people losing their jobs in the next 18 months.

To make things worse, some analysts expect house prices to remain low for at least five years, extending the period of negative equity risk well into the future.

The negative equity trap has a further knock-on effect on the troubled economy Tripe says it will dent consumer confidence and spending.

"Negative equity or not, lower house prices will make people think, `oh, I'm not as wealthy as I used to be, so I'd better spend less'."

Banking expert and principal of mortgage brokers Squirrel Financial Services, John Bolton, says people feeling the financial crunch should try to ride it out if they can as property values will eventually pick up again.

"You only lose money if you sell... You've got to take a long-term view and as long as you're not forced to sell, things should come right again.

"To an extent, price drops don't reflect the real value of something; they just reflect the value at that point in time."

IF YOU'RE IN STRIFE
* Most lenders offer repayment holidays of up to 90 days enough to build up your reserves so weekly outgoings are not as great.
* Convert to an interest-only mortgage until your situation improves. This will reduce your repayments. 
* Extend the term of your mortgage. This should be seen as only a short-term solution.
* Look at how you might increase your income seek additional part-time work, take in a boarder or set up a small business from home.
* Look at ways of reducing your outgoings is there anything in your budget that you can do without? 
* Selling luxury items or household goods that you don't need is preferable to selling your house. If you have a late-model car, swap it for a cheaper model and put the money towards paying off your mortgage.

- © Fairfax NZ News