Reaching negative equity is a ‘very real possibility’

AS national home prices soften, how big is the risk that first home buyers using the government’s 5% deposit scheme will be forced to sell at a loss?

Low-deposit home buyers are the most vulnerable if prices fall but experts say widespread negative equity remains unlikely unless there is a sharper housing downturn or rise in unemployment.

Negative equity occurs when a property’s value falls below the mortgage owed and generally only becomes a problem if owners are forced to sell due to factors like job loss or relationship breakdown.

Real estate commentators, including Tom Panos, warn first home buyers using the government’s 5% deposit scheme are particularly exposed because they are borrowing larger amounts relative to their deposit.

REIA president Jacob Caine believes there is a “very real possibility” of buyers entering negative equity amid higher interest rates and softer house prices, with recent policy changes – which end the 50 per cent capital gains discount and removing negative gearing for established homes – also expected to put downward pressure on values.

“Marry all of those things up and you’ve got a situation where someone who’s buying today with a 5% deposit may be sitting on a property that’s worth less within only a few months,” he says.

However, Reserve Bank of Australia governor Michele Bullock last week said “practically no one is in negative equity” with the central bank describing current levels as “absolutely minuscule”.

Johnathan McMenamin, head of economic forecasts at Barrenjoey, believes concerns about negative equity are overplayed and any instances would be rare given strong labour market conditions and relatively low unemployment.

“There might be a few rare occasions where somebody might be in negative equity but, as a whole, the housing market still has performed incredibly well over the last five to 10 years and this would be a very small minority of people,” he said.

McMenamin said banks and mortgage holders would be most concerned if the unemployment rate rises significantly in a short time, potentially forcing distressed sales.

However, the labour market has been performing well: “We’d say there’s actually an excess of demand for workers at the moment, which means that a large lift in the unemployment rate is unlikely to happen.”

First-home buyers tend to have stronger income growth than other buyers, given they are typically mid-career and promoted more often, so there is “very little evidence” they are also more likely to default because of higher interest rates.

McMenamin expects national house prices to fall only modestly, with the lower end of the market likely to outperform the higher end as is typically the case during downturns.

“That, of course, will be helped by this first-time buyer incentive,” he said.

“In the scheme of things, we don’t see national house prices falling more than three or four per cent so it is a very small downturn.

“In most capital cities outside of Sydney and Melbourne, they’ve seen in the order of 90 per cent to 100 per cent house price growth in the last five years.”

Melissa Barlas, owner of Melbourne firm Conveyed, said while the 5% scheme can help buyers enter the market, it should be used cautiously, with an added savings buffer of at least two per cent.

“It is a way of entering the market, if you don’t have any other recourse,” she said.

“Even if we see a dip in the market now in response to the Budget announcements, that’s not going to be forever. Over the years, property prices will keep going up, especially if people are buying in suburban areas.”

The Albanese government expanded the 5% deposit scheme last October, with unlimited places, higher property caps and no income limits.

It enables eligible first home buyers to buy a home with a deposit as low as five per cents, without having to pay Lenders Mortgage Insurance through a government-backed loan guarantee.