Experts say that even for those who may have purchased property under the 5% deposit scheme, the impact of negative equity will only be felt if they are forced to sell. This analysis comes as Liberal MPs warn first-home buyers about the risks, but economists believe there is little cause for concern.
Falling Prices Concentrated at Top End
Economists note that falling house prices are largely occurring in the more expensive parts of Sydney and Melbourne's markets, making them less likely to affect first-time property owners. Concerns that first-home buyers with small deposits might find their mortgages exceeding home values may be alleviated by new data showing price declines are centered in the top end of these cities' property markets.
Rising inflation, interest rates, and worries about the economic fallout from the Middle East conflict have contributed to depressing housing values in Australia's two largest cities. Commonwealth Bank economists recently predicted that values in 2026 would eventually fall by 6% to 7% in Sydney and Melbourne.
First-Home Buyers Often Borrow to the Limit
Australia's affordability crisis means first-home buyers often borrow at the maximum of their capacities. It takes over a decade to save a 20% deposit on a median home in Sydney, so new entrants typically find ways to buy with a smaller deposit, such as through the bank of mum and dad. Since home prices began falling, concerns have emerged for potentially tens of thousands of first-home buyers who, often with the help of the government's 5% guarantee scheme, may soon owe more on their homes than they are worth.
Several Liberal MPs and senators have raised alarms for young Australians who, in the words of Liberal MP Andrew Hastie, "are leveraged up to their eyeballs" and now "looking down the barrel of negative equity." However, Gerard Burg, head of research at Cotality, downplayed these fears.
Market Segmentation Offers Protection
"It's always difficult to know where first-home buyers are making a purchase, but we do know that it's most likely to be in the bottom 25% of the market, just from an affordability perspective," Burg said. This is evident in both Sydney and Melbourne, where the cheapest dwelling values in the three months to May were up 0.4% in Sydney and down 0.2% in Melbourne, considerably stronger than trends for the upper quartile or middle of the market.
Burg noted that it remains possible some recent purchasers may be in a situation where their home's value is now less than their mortgage, particularly if they bought close to the recently lifted $1.5 million Sydney price cap under the 5% guarantee scheme. "If we see a downturn similar to larger ones we have seen in the past, there is the risk that some buyers who bought at the peak of the market on the 5% deposit scheme could find themselves in negative equity. The question is how much of a risk is it? A lot of people talk about it as a large existential crisis with huge impacts. But it's only a huge problem if you are forced to sell," he said.
Burg added: "I certainly wouldn't suggest it is a pleasant experience, and it would put you in personal distress. But homeowners who have jobs should be able to withstand a period of negative equity, knowing that history suggests the downturn will be relatively short."
Affordability Supports Lower-End Demand
Angus Moore, a senior economist at REA Group, agreed that price falls have so far been experienced in more expensive suburbs, such as Sydney and Melbourne's eastern suburbs, which are not typical hunting grounds for first-time buyers. While affordability concerns would likely support demand for lower-end properties, Moore said it was possible that changes to capital gains tax and negative gearing proposed in the recent budget could mean fewer bargain-hunting investors and weigh further on prices.
"A more important reason to think about negative equity is that it can limit people's options," Moore said. "When people are having difficulty with their mortgages, that's when you can run into trouble. Refinancing or selling and moving becomes harder when you're in negative equity. The good news is that unemployment is very low and arrears rates remain quite low. Which means the risk of people being unable to pay their mortgage is not that high."
