Recent commentary has flagged negative equity as a potential risk for first home buyers who entered the market during 2024–2026, particularly those who borrowed at high loan-to-value ratios when prices peaked. The question is not whether some buyers are underwater on paper, a subset already are, but how large that cohort is, what price movements would expand it materially, and when paper losses cross into genuine financial stress.
Negative equity occurs when outstanding debt exceeds property value. A buyer who purchased with a 95% LVR at the peak needs only a 5% fall to be technically underwater. A 90% LVR buyer needs a 10% decline. The mechanics are simple; the risk is asymmetric.
The at-risk cohort: size and composition
First home buyers accounted for roughly 28–32% of owner-occupier loan commitments through 2024–2025, according to ABS lending data. A meaningful share borrowed at LVRs above 90%, often using the First Home Guarantee to sidestep lenders mortgage insurance. This program allows eligible buyers to borrow up to 95% with a 5% deposit, backed by a government guarantee.
If national dwelling values fell 7–10% from recent peaks, a scenario within the range of modest corrections seen in 2022–2023, the proportion of recent buyers in negative equity would rise from single digits to potentially 15–20% of those who purchased in the past 24 months. Sydney and Melbourne, where prices climbed sharply in 2024 before softening, carry the highest concentration of this risk.
The cohort most exposed: metropolitan first home buyers aged 25–35, dual income households stretching to serviceability limits, properties purchased at auction premiums in outer suburbs with thinner liquidity.
The thresholds: when do paper losses become stress?
Negative equity alone does not trigger default. A homeowner can remain underwater for years if they can service the loan and have no need to sell. The pressure points emerge when one or more of the following conditions appear:
- Job loss or income shock, unemployment remains low at 4.1%, but any rise above 5% historically correlates with rising mortgage arrears among high-LVR borrowers.
- Forced sale, divorce, relocation, health events. Negative equity turns into realised loss only if you sell, and selling underwater means bringing cash to settlement or negotiating shortfall debt with the lender.
- Refinancing roadblock, if the property value falls below 80% LVR at maturity, borrowers lose access to competitive rates and may face higher costs or difficulty switching lenders.
- Interest rate movement, fixed-rate rollovers in 2026–2027 will shift thousands of borrowers from sub-4% rates to variable rates near 6–6.5%, lifting repayments by $400–$800 per month on a $600,000 loan. Negative equity compounds this stress because the borrower cannot refinance to a better deal without equity or additional cash.
The catch: serviceability buffers applied during approval (testing at 3% above the contract rate) mean most borrowers can technically afford higher repayments. But “can afford” and “comfortable paying” are different thresholds, especially for households already spending 35–40% of income on the mortgage.
How this compares to previous corrections
Australia has limited modern experience with widespread negative equity. The closest parallel is Western Australia post-mining-boom (2014–2018), where Perth median house prices fell 18% and pockets of high-LVR buyers were trapped underwater. Arrears rose modestly but default rates remained low, below 1.5%, because unemployment stayed manageable and most borrowers could service debt.
The GFC saw prices fall 5–8% nationally in 2008–2009, but the correction was brief and equity buffers were larger, median LVRs at origination were closer to 75–80% then, versus 85–90% now among first home buyers.
The key difference today: higher absolute debt levels relative to income. A $700,000 loan at 6.5% on a $100,000 household income is more fragile than a $400,000 loan at 5% on the same income, even if LVRs are identical. The margin for error has narrowed.
Risks to watch
- Price falls accelerating beyond 10%, if a recession or credit crunch drives values down 15–20%, the cohort in negative equity expands rapidly and liquidity dries up, trapping more sellers.
- Unemployment rising above 5%, job losses push marginal borrowers into arrears; lenders tighten further, creating a feedback loop.
- Policy missteps, if government support programs (First Home Guarantee, stamp duty concessions) wind down abruptly, demand weakens and entry-level prices fall harder.
- Regional divergence, outer-ring suburbs that boomed on pandemic demand (Melton, Penrith, Logan) face steeper falls if commuting patterns revert and buyer interest shifts back to inner areas.
The base case: manageable but growing
Under current conditions, unemployment stable, wages growing modestly, RBA on hold or cutting slowly, negative equity remains a tail risk, not a systemic crisis. Most affected borrowers can service debt, and those who can hold will ride through the paper loss.
But the cohort at risk is larger than in any correction since the early 1990s, and the triggers for stress are closer to activating. A 12–15% price fall combined with unemployment above 5.5% would push arrears materially higher, likely above 2%, and force lenders to crystallise losses through distressed sales.
The question for policymakers and lenders is not whether some buyers are underwater now, they are, but whether the conditions that turn paper losses into forced sales are likely over the next 18 months. Right now, the probability is low but rising.
If you’re deciding now
If you purchased in the past two years at high LVR and prices in your area have softened, focus on three actions: build an emergency buffer (three to six months of repayments), lock in employment stability, and avoid taking on additional debt that tightens your serviceability. Negative equity only matters if you need to sell or refinance, if you can hold, time solves the problem.
If you’re considering buying now and prices are still elevated, model your purchase against a 10% fall scenario. Can you service the loan if rates stay at 6–6.5% for three years? Can you hold if the property value drops below purchase price? If both answers are yes, the risk is manageable. If either is no, wait or adjust your budget downward.
APRA’s new crackdown to hit ‘overstretched’ property investors offers context on how lenders are tightening serviceability assessments, which affects refinancing options for borrowers approaching negative equity.
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General info, not financial advice.
