Could someone please explain negative equity to me?

[Bluebean]

hi all,

Its probably a really stupid question, but here goes - what exactly does negative equity mean? I'm aware that its when a house ends up being worth less than you paid for it, but what other implications are there?

suppose I buy a house for 300k, and there is a property crash and the value of the house drops by 50k - is there any typical length of time before prices might start to go up again? Is there a life cycle to a property crash is what I'm asking I suppose?

When the crash happened in the UK some years back - how long was the 'recovery' period?

 

[DrMoriarty]

Definitions of on the Web:

• [SIZE=-1]
• Where the outstanding loan is higher than the market value of the mortgaged property.
  www.cheapmortgages.com/glossary.htm[/SIZE]
  [SIZE=-1]
• When the value of a property is worth less than money owed on the mortgage.
  www.loansdoctor.co.uk/loansdoctorjargonbuster_3.htm[/SIZE]
  [SIZE=-1]
• When the amount you owe on your mortgage is more than the current value of your property you are said to be in Negative Equity. See Negative Equity [link to negative equity article] to see how Negative Equity can affect you.
  findbulgariaproperty.co.uk/index.php/site/property_glossary[/SIZE]
  [SIZE=-1]
• This is where the money you owe on the mortgage is greater then the value of the property.
  www.themortgagebureau.co.uk/property-glossary.htm[/SIZE]
  [SIZE=-1]
• The situation where the market value of a property has fallen to less than the amount of the outstanding loan still owed.
  www.commercial-mortgage-loan.co.uk/about/glossary.htm[/SIZE]

 

[ClubMan]

but what other implications are there?

Arguably none if you are an owner occupier who is not planning on selling, moving or releasing equity from the property.

 

[JohnBoy]

In the UK the recovery period from the last big property crash (early 90s) depended on where you lived. The prosperous and well to-do areas recovered more quickly (as you might expect).

It was not until 1999 that the UK average house price recovered to the peak that it occupied during the boom, so for the UK at least, the recovery from the crash took as long as the boom itself.

http://www.housepricecrash.co.uk/

I am not aware of any theory that estimates the probable duration of the fall-out from the bursting of an investment bubble but the longer it goes on (assuming that it is a bubble) the longer and more painful will be the correction.

 

[Bluebean]

Thanks for the advice. We would not plan to move for at least 5 years, but circumstances may change which would alter that.

Would I be right in thinking that (as JohnBoy said) one would be better off to buy in a well-to-do/prosperous area if possible? Rather than staying towards the cheaper end of the market?

thanks.

 

[conor_mc]

Thanks for the advice. We would not plan to move for at least 5 years, but circumstances may change which would alter that.

Would I be right in thinking that (as JohnBoy said) one would be better off to buy in a well-to-do/prosperous area if possible? Rather than staying towards the cheaper end of the market?

thanks.

Not necessarily. A 20% crash on a 600k house is a lot more money than a 20% drop on a 300k house.

The key is to get quality. There's a potential market for all types of homes, you just need to pick one with a big potential market. For example, 1-bed apts in Dublin City Centre will have a bigger market than a 1-bed in Drogheda. Similarly, a 3-bed semi will sell easier than a 2-bed apt because a 2-bed is really only suitable for two people, whereas a 3-bed can accomodate a couple, 3/4 renters sharing, or a family with 3 or maybe even 4 kids.

If your circumstances may change, e.g get married, have kids, etc. then maybe you'd be better off stretching for a home that could meet those needs if you did end up in negative equity, rather than going for a cheap "starter-home" that you might not be able to get out of for a number of years if there were a property crash.