Falling house prices trigger fears of negative equity - but how big a problem is it?

As house prices plunge, there are fears that negative equity is on the rise in Australia, but what is it and what is actually happening?

ANZ this week forecast house prices to fall from 5.2 per cent to 14.5 per cent - or $56,017 to $236,312 - in all the major cities.

The Coalition has blamed it on the federal government’s changes to the tax settings to limit the generous benefits property owners have enjoyed for decades.

“(Prime Minister Anthony Albanese) is knee-capping young Australians who aren’t even in the market, and he’s knee-capping older Australians and families that have saved and sacrificed,” shadow treasurer Tim Wilson told 4BC on Thursday.

“And that’s why we’re seeing now a rise in negative equity where people owe more on their home than it’s worth.”

What is negative equity?

Negative equity happens when the value of an asset, like a home, falls below the remaining balance on a loan.

For example, if you owe $500,000 on a mortgage, but your house is only worth $450,000, then you have $50,000 in negative equity.

This usually happens when house prices fall, buying at a peak and low deposits, like the 5 per cent first home deposit scheme.

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Federal politicians have been wary to say whether they would like to see house prices come down, as about 67 per cent of Australians own their own home and 25 per cent of those have a mortgage.

Housing Minister Clare O’Neil said the market is undergoing a correction following low auction clearance rates in June – a remark that Treasurer Jim Chalmers was forced to walk back.

Opposition Leader Angus Taylor has said he wants house prices to be affordable.

Greens housing spokesperson Barbara Pocock called for house prices to fall to give first home buyers a chance of getting into the market.

Has there been a rise in negative equity?

Canstar’s data insights director Sally Tindall said the ANZ research on falling house prices paints a bleak picture for anyone who bought a home near or at the peak.

The latest data by the Reserve Bank in June showed negative equity affects less than 1 per cent of all borrowers – including those with a mortgage.

Speaking after the Reserve Bank handed down its latest interest rate decision this week, Governor Michele Bullock said she was surprised the extent and speed of the housing market downturn.

But she stressed that even under a scenario where prices fall by 20 per cent, only about 5 per cent of households would experience negative equity.

“Negative equity only matters if you are a distressed seller and you need to get rid of the property because you lose your job or for family breakdowns or things like that,” she said.

“Awful circumstances, which are compounded by the fact that you’d have to sell your house, but it doesn’t pose a risk to the financial institutions because they are very well capitalised.

“So yes, we’re alert to that, and we are looking at the potential impacts of that. But we don’t think there are financial implications.”

Who is most at risk of falling into negative equity?

Independent economist Saul Eslake said the mortgage holders most vulnerable to falling into negative equity are those who have both purchased a home recently and used Labor’s 5 per cent first home deposit scheme.

“For the very small percentage of the people who find themselves in that position, it’s not pleasant. It’s not a nice feeling,” he said.

“But it’s a feeling rather than a practical problem.”

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Eslake said the housing market typically recovers over time and would not affect mortgage holders unless they are also in a situation where they have to sell, like a loss of employment, a move or a relationship breakdown.

“But absent those, which I would guess account for a relatively small proportion of people who might be in the negative equity position,” he said.

“They will dig themselves out of it by a combination of paying down their mortgage every month, and even though prices might continue falling for another year or so, eventually history tells you they’ll stop falling and start to turn around again.”

Tindall added that negative equity removes flexibility in the short term, making refinancing harder.