Negative equity is a situation that arises when the amount owed on the mortgage(s) is greater than the value of the property against which the mortgage is secured. This can arise either because the amount owed has grown to an amount higher than the property's value due to capitalisation of interest or because the value of the property has declined (or a combination of the two). Occasionally it may be the result of borrowing more than the purchase price but such situations are very unusual.
Negative equity is not a good situation. It means that if you sell the property, not only will all of the sale proceeds go to the lender as partial repayment of the debt, but you will still owe the lender money and have to pay the costs of sale out of your own pocket. Property owners with negative equity who are unwilling or unable to meet the shortfall and costs are usually forced to wait out the downturn until values recover. Whether this is the smartest decision to make is another matter. Although I cannot speak from personal experience, I would expect that being in negative equity is a very worrying situation.
Negative equity cases in Hong Kong are estimated to have peaked in June 2003 (the time of the SARS epidemic) at about 106,000 cases. This figure has declined to 8,777 cases at the end of June 2006. In three years the number of negative equity cases has fallen by 92%. The delinquency rate for those still in negative equity remains an insignificant 1.13%.
Although it was a long, painful six year decline from the 1997 peak until the 2003 low, the massive decline in the number of negative equity cases and the persistently low delinqency rate shows how robust the housing sector can be in times of adversity and how rapid a recovery can be. Contrast Hong Kong's experience with Japan's to see a very different example of how long downturns can last.