Why most homeowners don’t need to lose sleep over negative equity
Owing more to the bank than your home is worth is a daunting prospect. But if you’ve bought a place to live in, not as an investment, there’s little reason to panic.
Negative equity occurs when the value of a home falls below the amount still owed on a mortgage. According to Australia's Central Bank Governor Michele Bullock, less than 1% of households in Australia are currently in negative equity. Even if house prices were to fall by 20%, only around 5% of households would find themselves in this situation, which could still involve thousands of individuals, including recent homebuyers with substantial loan balances.
While negative equity might seem like a significant issue, it may not be as problematic as portrayed by recent headlines. With prices currently sliding from recent highs, and recent interest rate increases and tax changes cooling the market, downward pressure on prices is likely. This could lead to a higher number of Australians facing negative equity.
However, those most affected by negative equity are typically first-time buyers who purchased at or near the market peak and are forced to sell due to circumstances like unemployment or family breakdown. These homeowners could face significant financial hardship, owing money to the bank after selling their home. Nonetheless, for others who do not need to sell immediately, the effects of negative equity are less severe.
They may experience reduced household mobility, difficulty refinancing, and a "wealth effect" that discourages spending.
The good news is that negative equity is more likely to impact households that purchased before 2025, as the average dwelling is held for eight to ten years. While factors such as tax changes and interest rate hikes may shift demand slightly, the imbalance between housing demand and the limited supply of properties is expected to continue fostering price growth in the long term.
Although sustained, sharp market downturns are unlikely in the near future, due to a balance between demand and supply, older markets may experience slower declines. In the meantime, homeowners concerned about negative equity should maintain a focus on paying down their mortgage and waiting out any potential downturns.
Written by urgent.news from The Conversation AU's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
