What is negative equity?

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mollyblue

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Can someone clarify for me please......
Am I right in believing that negative equity is when your mortgage balance is higher the value of your house? Over the course of conversations with friends it seems to me that some believe negative equity is simply the value of their house now is less than what they paid for it. Are they right?
We recently moved house as value was marginally higher than mortgage balance and we wanted to get in before new rules applied. But a friend said we should have waited until house value was back to what we paid for it 11 years ago so we wouldn't be in negative equity now!
 
Your friends are wrong.

This is a common mistake.

Even an AIB mortgage official confused it with me.

I am not in negative equity, but I have a massive capital loss. (on paper)
 
Negative equity is a problem that will slowly diminish, as mortgages are paid off.

The capital loss may stay forever in some areas, where house prices may never return to peak values.
 
Thanks Protocol. Now another Q/observation!.... Obviously on paper we have a capital loss - our house sold for 50,000 less than what we paid- however I like to look at it this way (it helps stop the panic setting in!), we had to live somewhere for the past 10/11 years and it cost us 50,000 to do so (let's forget the bills and cost of decor etc) so approximately 5,000 a year. We would have had to pay rent/mortgage anyway for those years so are we at a loss? Have we just let 50,000 leave us unwittingly?
What do others out there think?
Should we have stayed put as many others are doing? (A bit late to be asking that Q now that we've moved!)
 
Personally, I would compare the interest cost on the mortgage with the alternative rental cost, as measures of the cost of accommodation.

I would consider you have suffered a capital loss on an asset.

Others have argued with me, saying that if house prices have fallen, and you sell and buy elsewhere, then you haven't really suffered a capital loss, as the house you buy will also have fallen in value.

I don't agree with that. It's still a capital loss.
 
It may be sensible to suffer the capital loss if the change of house/location has benefits.
 
So you are saying we have lost 50,000???:( (panic)
I was of the mindset of those you don't agree with 're both houses fallen in value. Naive?
 
But I presume the house you bought also was less in price that it would have been in the boom so one cancels out the other does it not?

If you waited until prices were back to the level that you bought at so that you would be back up the 50k then surely the houses you want to buy will also be up in price to same levels so you would have to spend the extra you get for your own on buying the new one unless of course you were moving from Dublin to somewhere in the country where prices hardly change boom or not.
 
Yes Monbretia that is what I was thinking...it all cancels each other out give or take a few thousand. Unfortunately no we didn't sell in Dublin and go to country with a tidy little profit!
We did move to a supposed "better" location but more house for your buck in previous location. And so once again it boils down to everyone's favourite dilemma...house or location!
 
While it maybe a capital loss as Protocol has outlined, that doesn't mean it is a total loss to you or that you are out of pocket as a result. It is offset by other considerations. The cost of replacement is lower (your "better" location will likely still be below the 2005 level) and the value you extracted from it is greater (you didn't have to pay rent for that time).
 
There is a different way of looking at this, what price happiness. Are you happy you moved?
 
I've pondered this myself recently. I bought a house in 2004 and have just sold it for the same amount I paid for it. I've probably put a minimum of €60,000 into it over ten years. Obviously I haven't gotten any of that back.
I have paid approx €120,000 in mortgage payments & reduced the amount outstanding by €85,000. So have I really lost €60,000? I don't think I have.
It has cost us €120,000 + €60,000 - €85,000 = 95,000 to live here for ten years.

On the other hand we have paid an extra €17,000 to move to another house (not counting fees & stamp duty etc). That house would have cost an extra €50,000 us stamp duty of about €35,000 back in 2004. So we've traded up for €17,000 plus stamp duty rather than €85,000.

I think it might be like statistics you can argue this any way you want.
 
Thanks for replies,it is interesting to see peoples take on this. Just as you said Butter it can be argued either way so for my sanity I will stick to my simplistic view on it and not think of it as a loss of tens of thousands of euro! Butter I'm impressed to hear that you sold for what you bought.
Bronte yes we're happy to have moved to new location, the house needs work, more than we realised, and I'm finding that part a bit of a struggle to accept,( I was heavily pregnant when we bought so I'm blaming pregnancy hormones on not seeing things that I should have spotted!) husband however loves the move and the house. Overall it was a good decision for us.
 
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