Sometimes drag buys a game on Steam at full price, and then a week later, the game goes on sale. Drag thinks “damn it, drag should have waited”. But drag’s never that upset, because drag wouldn’t have bought the game if it weren’t worth the price. Drag failed to save some money, but drag still values the game more than that money, so it’s not a big issue.
The concept of negative equity was recently explained to drag, and it sounds like the housing equivalent of that. It happens when the price of housing crashes, but you already have an expensive mortgage out on the house. You still have to pay money worth more than the value of the house. Therefore, your equity, or equivalent share of ownership, is effectively less than zero.
The politician drag was talking to said negative equity is a big problem and it’s why we can’t just crash the housing market to solve all our cost of living problems. But drag doesn’t understand. If you take out a mortgage, you should be able to afford it with your income, and the house should be worth more to you than its market value. Negative equity sounds like a huge bummer, but that politician was talking like it was something life ruining.
Why’s negative equity so bad?
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It’s bad because it’s dangerous. If something happens and you can’t pay the mortgage any more, then the idea of a mortgage is that you can always just sell the house to settle the debt instead.
If you get into negative equity though, then even if you sell the house you could owe a huge amount of money and have no way to do anything about it. An under-control debt could turn into a crippling debt overnight.
I suspect the real reason politicians care, though, is because that’s the one scenario in which the lender might lose money. They prefer their customers being able to pay their debts (theoretically)
No, the politician drag was speaking to is running on an anti-bank platform.
Based on your answer, it seems like negative equity is dangerous for a middle class worker who gets bumped down to the lower class, but a housing market collapse still benefits way more people who were less well off before the collapse. Perhaps the legislation to cause housing collapse could be bundled with a form of government insurance against negative equity…
It means that you can’t move. There are many cases where people sell their houses, either out of want (they’re moving somewhere else), or necessity (they can’t afford the upkeep or really need the money right now, etc.)
If you take out a mortgage, you should be able to afford it with your income,
True. But income changes with time and it doesn’t always go up.
Negative equity means someone who lost their job can’t sell their house and get enough money to support them and get a smaller house. It’s bad because real estate is supposed to be the most reliable investment: it’s a plan B (and usually more of a plan C) and if that fails, people may have nothing left at all.
Hmmm… Okay, well that does sound bad, but since it only hurts people who struggle with getting a job afterwards, but who were pretty well off to begin with, which isn’t many people, it sounds like crashing the housing market is worth it. Needs of the many and all that.
Nah bruh you are misunderstanding. Politicians and other rich and powerful use property as an investment. This means they buy up all the properties, rent it out, and as prices go up so does its value. They then sell it for double the price in 10 years.
It’s life ruining because it affects the politicians, the rich and the powerful. There are also some very few who use it to get ahead, and they likely will be the “example” case so that people don’t think about the 10 properties Mr politicians estate owns, or the 5 commercial real estate they have in some mixed fund. And the potential millions they can make by ensuring certain policies are kept.
Negative equity is bad when money is being borrowed. It’s true for all secured loans, not just housing.
- it blocks refinancing which many people do every 3-5 years.
- it means you are paying interest on money you’ve already lost, in a way compounding that loss.
- homes are a common inflation hedge and source of retirement income. Negative equity breaks this assumption.
- negative equity encourages holding on to a property to avoid realizing the loss, this prevents more inventory from being on the market.
- negative equity can result in loss of both the asset, and an additional bill for the remaining balance which is a double whammy.
From a personal pov, negative equity means jack shit because you have a house.
From a bank pov, you now owe them more than they could take from you in lieu of payments if everything goes tits up. They do not like that.
It’s because some fucking morons play a zero sum game where they either have all of the toys or they believe they are losers. They don’t understand that this is exactly what makes them losers. Unchecked capitalism is a disease that tries to ruin and kill everything it encounters.