The number of first home buyers sitting in negative equity climbed to 480 households in August 2026, up from 87 the month before. All used the government’s 5% deposit scheme, purchased near price caps, and have watched Sydney and Melbourne values slide since settlement.
That’s 1% of scheme participants, a small share, but five times the rate recorded in July. The increase tracks capital city price falls over winter, with Sydney down 0.3% in August and Melbourne down 0.2%. Regional markets stayed flat or edged higher, creating a geographic split that determines who holds equity and who doesn’t.
Who holds the lowest equity right now
Melbourne’s Inner East leads negative equity exposure. First home buyers who purchased near the $900,000 threshold cap in December 2025 now sit furthest underwater. Sydney’s higher-socioeconomic postcodes follow the same pattern, purchases closer to the cap, sharper falls since.
Regional buyers tell a different story. Households in New South Wales’ New England and North West regions who paid around $400,000 when the scheme expanded now hold over 18% equity, well above their 5% deposit in under a year. Price stability at the affordable end kept equity intact while premium segments corrected.
The mechanics: how 5% deposit borrowers sit at break-even or below
Borrowers using the scheme put down 5% and take a loan for the remaining 95%, with the government guaranteeing the lender against default on the portion above 80% loan-to-value ratio. When property values drop by more than 5% from purchase price, equity turns negative, the borrower owes more than the home is worth.
This calculation assumes no offset account savings and no principal paydown since settlement. In practice, some borrowers will have built a buffer. The 480 figure represents maximum exposure, not certain distress.
The government guarantee changes who carries the risk. Lenders face limited loss if borrowers default, because the guarantee covers the high-LVR portion. That insulation means lending standards for 5% deposit loans may stay loose even as negative equity rises, unless unemployment climbs and arrears follow.
Where the pressure sits and where it doesn’t
Capital city versus regional divergence matters. Most scheme guarantees issued since the October 2025 expansion went to homes priced between $300,000 and $600,000, well below median values for most markets. That affordable segment, where first home buyers compete with investors, has stayed firmer than the top end.
Sydney and Melbourne’s higher-priced cohorts face the steepest equity loss because they bought near caps during a brief window of strength, then watched premiums unwind. Regional buyers at lower price points benefited from tighter supply and steadier demand, building equity instead of eroding it.
Employment diversity also separates city and regional risk. Urban job markets tend to weather economic shocks better than single-industry regional towns. If unemployment rises as a result of prolonged higher interest rates, regional borrowers may face higher default risk despite stronger current equity positions.
The catch
- Arrears and default rates sit at 1% across the broader mortgage market, per credit ratings agency Moody’s, benign by historical standards
- Negative equity only becomes a realised loss if the borrower must sell or defaults; households that keep paying and stay employed ride out the paper loss
- The government guarantee insulates lenders, not borrowers, negative equity households still owe the full loan amount, and selling means crystallising the loss
- Regional equity cushions depend on local employment holding, economic shocks hit harder in less diversified job markets
Base case, upside, downside
Base case: negative equity stays contained at 1–2% of scheme participants. Arrears remain low because employment holds and most borrowers can service loans. Capital city prices stabilise by mid-2027, regional markets stay flat to slightly positive. Equity erosion stops but doesn’t reverse quickly.
Upside: unemployment stays below 4.5%, interest rates ease by late 2026, and buyer demand returns to premium segments in Sydney and Melbourne. First home buyer equity improves as values recover in the next 12–18 months. Scheme participants who hold through the cycle rebuild equity.
Downside: unemployment rises above 5%, triggering a wave of forced sales among overleveraged households. Negative equity expands beyond 5% of scheme participants, particularly in Melbourne’s Inner East and Sydney’s premium postcodes. Lenders tighten standards despite the guarantee, cutting off new 5% deposit lending and stalling first home buyer demand.
What happens if more borrowers fall underwater
The government guarantee shifts lender risk, but it doesn’t change borrower reality. A household in negative equity can’t refinance without bringing cash to settlement, can’t sell without writing a cheque for the shortfall, and faces higher stress if income drops.
If negative equity spreads beyond current levels, say, 5% of scheme participants instead of 1%, political pressure may build to expand relief measures. Past cycles show that widespread negative equity among first home buyers tends to prompt policy responses, from payment deferrals to equity-sharing programs.
Lenders, meanwhile, face minimal direct loss thanks to the guarantee. That could keep lending standards loose for new 5% deposit loans, bringing more buyers into a falling market and compounding the problem. Alternatively, lenders may tighten anyway if they see portfolio risk rising, even with the guarantee in place.
What to watch in the next four months
Sydney and Melbourne spring auction clearance rates. If clearance stays below 60% through October and November, price falls will likely continue and negative equity will spread to more recent scheme buyers. A rebound above 65% would signal stabilisation.
Unemployment data from the Australian Bureau of Statistics. The current rate sits around 4.1%. A move above 4.5% would raise default risk and test whether the government guarantee holds lender behaviour steady.
Scheme take-up numbers from Treasury. If new guarantees issued drop sharply, it signals first home buyers are pulling back despite the 5% deposit offer, evidence that tightening is happening outside official policy.
Regional price movements in areas where scheme activity concentrated. If regional markets start falling, the equity cushion protecting those borrowers disappears and geographic divergence narrows.
Start here
If you used the 5% deposit scheme and purchased in Sydney or Melbourne’s premium suburbs in late 2025, check your current property value against your loan balance. If you’re close to break-even or below, build an offset account buffer equal to at least three months of repayments, it won’t change your equity position, but it gives you breathing room if income drops.
If you’re considering a 5% deposit purchase now, run the numbers assuming a further 5–10% price fall in capital cities over the next 12 months. Ask whether you can service the loan if interest rates stay at current levels for another two years, and whether you plan to hold for at least five years to ride out the cycle.
For a deeper look at how past corrections unfolded and which one this cycle most resembles, read Property price corrections: which past downturn does 2026 match?
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General info, not financial advice.
