Negative equity is rising as property prices cool
Falling property prices can push recent buyers into negative equity, but the risk is concentrated among highly leveraged owners who need to sell during a downturn.
Negative equity is a term we hear popping up in the mainstream media a lot at the moment but is it something investors and property owners really need to worry about?
For most owners the answer is no.
Negative equity occurs when you owe more on your home loan than the property is worth, usually as a result of property price declines.
It makes a good headline as property price growth cools and doomsayer predictions about property prices plummeting (highly unlikely) abound.
Those who have purchased recently are generally at a higher risk as they have not had sufficient time to build equity in their property, particularly if they have bought using the Federal Government’s 5 per cent deposit scheme.
Negative equity still a rarity - for now
But here’s the point many miss when discussing negative equity - it is not a problem unless you have to sell.
If you don’t have to sell in the short term, there is no need to panic. It’s not a crisis if you can continue paying your mortgage and wait for the next lift in property prices.
Inevitably, prices will rise again. Australia has a robust property market that has bounced back stronger than ever from major financial pressures in the past, including the Global Financial Crisis and the Covid lockdown period. The shortages that have driven prices and rents higher in recent years remain and are indeed made worse by the Federal Budget.
The Budget changes to property investment taxes and subsequent policy-on-the-run decisions have generated widespread uncertainty among real estate consumers, leading to short-term price decline in some markets that raises the possibility of negative equity for recent buyers.
If an owner has to sell, perhaps because of unexpected unemployment or a relationship breakdown, and the property sells for less than they owe, it is a problem as they will need to cover the shortfall.
But, according to Reserve Bank Governor Michele Bullock, less than 1 per cent of Australian households are in negative equity. And she says that, even if house prices fell 20 per cent, only about 5 per cent of households would be in negative equity.
Curtin University analysis by Professor Steven Towly said the biggest impact of negative equity is not losing everything, but becoming tied to a particular dwelling and being unable to move for a new job opportunity or life change.
But he says, given the average holding period for dwellings is between eight and ten years, there would need to be a sustained and sharp downturn to affect a significant number of households, particularly those that purchased before 2025.
That’s the one good thing about supply being so tight throughout Australia (and made more so by the Federal Budget); eventually that strong underlying demand will drive prices up again, further reducing the potential impacts of negative equity.
