Australia's Housing Market: Negative Equity Not as Scary as It Sounds

House prices in Australia have declined since their peak in 2021-2022, mirroring a similar pattern in New Zealand. While this may cause concern for homeowners who have seen their property value drop below their mortgage amount, experts suggest that negative equity is not as dire a situation as it seems.

The Reserve Bank of Australia (RBA) Governor Michele Bullock stated that less than 1% of Australian households are in negative equity. According to RBA modeling, even if house prices fell by 20%, only around 5% of households would be affected.

Being in negative equity means that a homeowner owes more on their mortgage than the current market value of their property. This can occur when a homebuyer purchases a property at or near the peak of the market and then experiences a decline in prices.

A recent example illustrates this situation: assume a first-home buyer purchased a small house in outer Sydney for A$1 million, borrowing $950,000 under the government's 5% deposit scheme. Over two years, the homeowner pays off $24,000 of the outstanding mortgage but sees the market value of their property fall by 10%, to $900,000.

If they need to sell quickly, the sale proceeds alone would not cover the remaining $926,000 on their mortgage, leaving them liable for a $26,000 shortfall. However, experts advise those in negative equity to 'sit tight, pay down that mortgage and wait it out.' 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.