What is Negative Equity in Zimbabwe & How Does it Work?

Negative equity is an important concept for homeowners, car buyers, and business owners in Zimbabwe. It occurs when the value of an asset falls below the outstanding balance of the loan secured against it. In simple terms, it means you owe more than the asset is worth, often referred to as being “underwater” or “upside down” on a loan.

Understanding negative equity helps property owners, vehicle buyers, and entrepreneurs make informed financial decisions in a market where property values and inflation can fluctuate rapidly.

Introduction to Negative Equity

Negative equity arises when the current market value of an asset is lower than the loan owed.

Key Points:

• Negative equity mortgage: A bond or home loan where the outstanding balance exceeds the property’s current market value.
  
• Negative equity definition: When liabilities surpass the asset’s value.
  
• Upside-down loans: Synonymous with negative equity.
  

How Negative Equity Works

Negative equity occurs due to:

• Depreciation of the asset (house prices, vehicles)
  
• Market conditions changing after purchase
  
• High loan-to-value ratios at the time of purchase
  

Calculation Example (Zimbabwe Context):

• Loan balance: USD 50,000
  
• Current property value: USD 45,000
  
• Negative equity: 45,000 – 50,000 = – USD 5,000
  

This can happen in:

• Residential properties in Harare, Bulawayo, Victoria Falls
  
• Vehicles purchased with loans
  
• Business assets and balance sheets
  

Key Terms

• Underwater / Upside-down loan: Loan exceeding asset value
  
• Home equity: Difference between property value and mortgage balance
  
• Loan-to-value (LTV) ratio: High LTV increases negative equity risk
  
• Negative amortisation: Occurs when loan payments are too low, increasing the balance

Common Causes in Zimbabwe

Negative Equity in Real Estate

Negative equity happens if house or apartment values fall below bond balances. For instance, during market slowdowns in Harare or Bulawayo, owners may owe more than their property is worth.

Implications:

• Difficult to refinance a mortgage
  
• Harder to sell without covering the shortfall
  
• May require out-of-pocket payments to settle the loan
  

Example:

• Mortgage: USD 100,000
  
• Current property value: USD 90,000
  
• Negative equity: – USD 10,000
  

Negative Equity in Car Loans

Cars in Zimbabwe depreciate quickly due to import costs, inflation, and mileage.

Risks:

• Trade-in may result in rolling over negative equity into a new loan
  
• Loan balance could exceed vehicle resale value
  
• Insurance payouts may not cover the full loan
  

Example:

• Car loan: USD 15,000
  
• Car resale value: USD 13,000
  
• Negative equity: – USD 2,000
  

Negative Equity in Business

Businesses can face negative equity if liabilities exceed assets, resulting in negative shareholder equity.

Causes:

• Operational losses or poor cash flow
  
• Overleveraged loans
  
• Large dividends exceeding profits
  

This signals caution but may be temporary if revenues increase or debts are managed.

Special Considerations & Risks

Negative equity reduces financial flexibility and increases stress. Risks include:

• Difficulty refinancing or selling assets
  
• Responsibility for outstanding loans even if the asset depreciates
  
• Financial strain for large negative balances
  

Strategies to Manage or Avoid Negative Equity

1. Make a larger deposit at the time of purchase
   
2. Choose shorter loan terms to reduce interest accumulation
   
3. Pay extra towards the principal when possible
   
4. Maintain assets to preserve value (renovations, servicing vehicles)
   
5. Wait for favourable market conditions before selling
   

Real-Life Examples in Zimbabwe

• Property owners: A homeowner owes USD 50,000 on a bond, but the house market value drops to USD 45,000. Selling requires covering USD 5,000 out-of-pocket.
  
• Car buyers: A vehicle purchased for USD 20,000 with a USD 18,000 loan may drop to USD 15,000 in value within a year, leaving USD 3,000 in negative equity.
  

Key Takeaways

• Negative equity occurs when loan balances exceed asset value
  
• Most common in mortgages and car loans
  
• Often caused by falling asset values, low deposits, or slow repayment
  
• Managing negative equity involves principal payments, asset maintenance, and market timing
  

It is not always permanent; equity can recover with market growth or extra payments