Liberals are scaring first-home buyers with warnings of negative equity – but experts believe there’s little to worry about | Housing

Fears that first-time buyers with small deposits will find their mortgages worth more than their homes may be allayed by new data showing falling prices are concentrated at the upper end of the Sydney and Melbourne property markets.

Rising inflation, interest rates and concerns about the economic impact of conflict in the Middle East have helped drive home values ​​lower in the country’s two largest cities.

CBA economists caused a stir earlier this month by predicting that values ​​in 2026 would fall by 6% to 7% in Sydney and Melbourne.

Australia’s affordability crisis means first home buyers are often borrowing at the limit of their ability. It takes more than a decade to accumulate a 20% deposit on the average house in Sydney, and new entrants often find ways to buy with a smaller deposit (like mom and dad’s bank).

Since house prices began to fall in Sydney and Melbourne, often helped by the government’s 5 per cent guarantee scheme, there have been concerns for potentially tens of thousands of first home buyers that they could soon owe more than their home is worth.

A number of Liberal MPs and senators were quick to sound the alarm about young Australians who, in the words of Liberal MP Andrew Hastie, have been “oppressed up to their eyeballs” and are now “staring down the barrel of negative equality”.

Cotality’s head of research, Gerard Burg, discounted these fears.

“It’s always difficult to know where first home buyers are buying, but we do know that from an affordability perspective alone, it’s likely to be in the bottom 25% of the market,” Burg said.

“This is clearly evident in both Sydney and Melbourne. [the cheapest] In the three months to May, house values ​​rose 0.4% in Sydney and fell 0.2% in Melbourne; “This has been significantly stronger than trends in the upper quartile or middle of the market.”

Burg said it was still possible for some recent homebuyers to be in a situation where their home was now worth less than their home, especially if they had bought at a price close to the recently removed $1.5 million Sydney price cap under the 5% guarantee scheme.

“If we see a downturn similar to the larger crises we have seen in the past, there is a risk that some buyers who bought into the 5% deposit scheme at the peak of the market may find themselves in negative equity.

“The question is: How risky is this? A lot of people talk about it as a huge existential crisis with huge implications. But that’s only a huge problem if you’re forced to sell.”

Burg said: “I definitely wouldn’t recommend it. [negative equity] It is a pleasant experience and it causes you personal distress. “But homeowners with businesses should be able to withstand a period of negative equity knowing that history shows the downturn will be relatively short-lived.”

Angus Moore, senior economist at REA Group, acknowledged that price declines had so far been experienced in pricier suburbs such as Sydney and Melbourne’s eastern suburbs, which were not typical hunting grounds for first-time buyers.

While affordability concerns are likely to support demand for lower-end properties, Moore said CGT changes and negative gearing proposed in the last budget could mean fewer bargain-hunting investors and put more pressure on prices.

“A more important reason to think about negative equity is that it can limit people’s options,” Moore said.

“When people have difficulty with their mortgages, that’s when you can get into trouble. When your equity is negative, it becomes difficult to refinance or sell and move.

“The good news is that unemployment is very low and debt rates are quite low, which means the risk of people not being able to pay their mortgages isn’t that high.”