Tens of thousands of Australians will be 'devastated' by house price corrections in the nation's two biggest cities, and could face the 'very dire situation' of having to sell at a loss, experts warn. Some Aussies took advantage of the government's 5 per cent deposit scheme to buy their first home in Sydney or Melbourne, only to be left with negative equity as a result of falling house prices in those cities.
In addition to a massive mortgage - as high as $950,000, if they bought a $1 million home - they will now owe the bank extra money if they sell. Critics say that's a dangerous position to be in, especially with high interest rates and property tax changes foreshadowing a deeper correction. Others argue it's a temporary situation that only matters if you are treating your home as a financial investment rather than a place to live.
The 5% Deposit Scheme and Its Impact
The 5 per cent deposit scheme was expanded in October and about 115,000 people accessed it in the following five months, according to Housing Australia. SQM Research estimates that of those, about 50,000 would have bought in Sydney and Melbourne, where values began falling earlier this year.
The firm's founder Louis Christopher said it was 'totally understandable' that first home buyers had jumped at the opportunity of the expanded scheme. 'No one was to foresee back in October that the RBA was about to lift interest rates three times,' Mr Christopher told news.com.au. 'No one was to foresee the Middle East war that would put huge pressure on the standard of living, over and above the interest rate rises. And of course no one was to foresee a federal government doing significant property tax changes that would aggravate the housing downturn which had already commenced.'
Negative Equity: A Dire Situation
Those first home buyers had bought at the peak of the market through no fault of their own. However, they had now found themselves in a financially risky position with limited options. It was very difficult to sell a home while in negative equity, and buyers would now be 'essentially stuck' in their home until the balance turned positive, Mr Christopher said. Lending options elsewhere, such as car loans, would become 'heavily restricted' for them, and 'if you have a scenario where someone loses their job and they're forced to sell, then it's a very dire situation indeed'.
'It's a real issue for anyone that wants to change their home or borrow money elsewhere,' the analyst said. 'And if anyone loses their job and they're forced to sell in negative equity, heaven help them.' He said in time, those buyers able to service their loan would get themselves back into positive equity, 'provided the market doesn't correct by too much'.
Forecast for Further Price Corrections
Based on declining auction clearance rates, SQM is currently forecasting a price correction of up to 9 per cent for Sydney and up to 7 per cent for Melbourne this calendar year, but Mr Christopher said it could drag on longer than that. 'We could have this downturn for the next three years, quite easily,' he said. 'The correction could be well and truly north of single digits — especially if we see another interest rate rise.' He said the government might even decide to rein in migration rates in response to political pressure from the rise of One Nation, putting further downward pressure on house prices.
A similar situation had played out in New Zealand, which saw a sharp correction in house prices in 2022, followed by values remaining stable at a lower level for the next several years up until today. 'There's also still a risk that if the market were to heavily correct, and we have a GFC type of scenario play out,' Mr Christopher said. 'I think you will find banks do have the power to come in and forcibly create a sale when there are negative equity situations. That certainly was the case in 2008, and I suspect they still have that power through the lending contracts as well.'
Contrasting Views: Temporary Phenomenon or Long-Term Risk?
The ABC's Alan Kohler went so far as to say that a 'generation of young families' who bought a house 'using too much debt' would now be 'devastated' in the correction. 'They are facing the loss of whatever equity they now have and a lifetime grind of principal and interest,' Mr Kohler wrote in his analysis.
Deyon mortgage broker Martin Eftimoski offered a different view, however, describing negative equity as a 'strictly temporary phenomenon'. 'House prices in the long term will keep growing at least with inflation, and your mortgage will keep declining as long as you keep paying it off,' Mr Eftimoski told news.com.au. 'If that bothers you as someone on the 5 per cent guarantee scheme, then you need to think carefully about why you are pursuing the scheme. Is it because you desperately want to secure your housing, or because you want a money printing machine?'
The mortgage broker said that ultimately, a short-term decline in house prices would only affect the time it took a home buyer to refinance, sell, or buy another property to live in. There were lots of reasons why home ownership made personal sense for people, he added, including family security, freedom and retirement benefits. 'Even if your equity goes down, you might still end up better off for all these practical reasons.'
Market Outlook and Expert Predictions
Although the market would pass through an 'air pocket' in the next six to 12 months, Mr Eftimoski argued there was still a massive housing shortage and competition for cheaper homes was fierce. He also predicted that rents would grow 'substantially' as a result of rental housing switching to owner-occupiers, and said that owning was a reliable way for Aussies to control their housing costs.
