‘We’ve lost half our deposit’: About 4000 first-home buyers owe more than their homes worth

Rising interest rates are not welcome news for most borrowers, but they hit especially hard for those who are paying off a home loan on a house that is now worth less than they paid for it.

Cotality chief economist Kelvin Davidson said, assuming all first-home buyers had a 20 percent deposit at the time they purchased, there were still about 3600 households nationwide who now owed more than the value of their homes.

Most would be people who had bought during the peak of the market, in late 2021 and early 2022. Prices are still down about 17 percent since that point, and more than 20 percent in Auckland and Wellington. Some parts of the country, such as Canterbury and Otago, have since returned to the prior peaks.

The true number in negative equity is likely to be higher than 3600 because many bought with a deposit much smaller than 20 percent. Cotality said about 29,000 first-home buyers bought properties during the 18-month peak of the market and a large proportion of them would now still be worth less than they paid.

Some recent buyers have posted anonymously on social media in recent weeks, sharing the human implications of the downturn.

One said they were separating from a partner and worried that their townhouse would not sell because next door was vacant and had not sold. “Our CV is down by $100,000 from our purchase price. Either way we will be in debt with mortgage repayments even if the house sells.”

Another who said they had bought a house in 2023 had seen their house value drop $80,000, even though they missed the peak.

“When you add the $35,000 agent fee to sell, we’ve lost half our deposit.”

Another said they had been left jealous of renters. “I bought at the peak in 2021 and the house has dropped at least $200,000 easily. It’s taken years to accept this is one financial mistake I’ve made which won’t kill me but still hurts.”

Some buyers talked about being stuck in townhouses and apartments longer than they intended to, because they had listened to advice that they did not need to buy a “forever home” first up.

Davidson his data assumed that they had not paid off much of the mortgage yet, which would be normal for a new borrower with a table loan. A large part of early repayments is interest and only a small amount goes to principal.

“It can’t be great for the mindset to be in negative equity, but it’s not necessarily a huge problem if people keep servicing the debt, which the majority are, there are hardly any non-performing loans at present. The bank won’t come knocking solely because of negative equity.”

Kiwibank chief economist Jarrod Kerr said it could be tough going for some people. He said he bought his first house in 2007, which then lost value and did not recover for years. There was a mental element to falling prices, he said.

“With interest rates going up on top of what is being labelled a cost of living crisis, it’s unhelpful, it really is. It’s not what we should be doing right now, in my opinion.”

Bruce Patten, chief executive at New Zealand Financial Services Group, said negative equity was primarily a problem when people needed or wanted to move.

“Our recommendation to them is, sit tight for a few more years, until the market starts moving again. So far, touch wood, we haven’t had a situation similar to that during the GFC, when there were lots of mortgagee sales with negative equity, leaving people with personal loans after their properties sold and nothing to show for it.

“The main advice is to speak to your adviser if you are struggling. We can help negotiate interest-only payments or repayment holidays in some cases but do your best to ride this point in time out.”

Campbell Hastie, of Hastie Mortgages, said he advised people to keep paying their mortgages and try not to think about it. He said he would look at borrowers’ equity positions when they came to refix mortgages because people who had bought with less than a 20 percent deposit were usually also paying a low equity premium on top of their interest rates, too.

“The fact of whether your equity position is improving or not in a sense sort of doesn’t matter so long as your loan is going down.

“That’s what a principal and interest loan is… so long as you’re making your minimum commitment there as long as the bank is concerned, they are not going to squawk at you.”

While Kerr said falling house prices could make people more reluctant to invest, such as business people seeking borrowing secured against their home, Otago University economist Murat Ungor said the number was likely too small to make a large difference.

“For those 3600 households, this is real and it is painful. Negative equity is a balance-sheet problem, not a cash-flow one, as long as they keep servicing the mortgage. The bank is not calling the loan provided they keep paying. But it does trap people: they cannot easily sell to move for a better job, and they cannot use their home as collateral to start a business. So there will be individual stories of lost opportunity. But as a drag on national investment or the wider economy? No. This is a personal finance story, not an economic one.”

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