Falling house prices bring relief for some while a financial nightmare for others

Meg Girdler went all in to buy her small Sydney apartment near the peak of the market in December last year.

The 46-year-old believes her house is now worth less than she paid for it and is at risk of slipping into negative equity, meaning her Marrickville home would be worth less than what she owes the bank.

"I just wanted a home and some stability, so yeah, it's a bit scary," Ms Girdler said.

Sydney property prices have dropped by 2.1 per cent since the November peak, according to Cotality data, amid rising interest rates, high inflation and low consumer sentiment.

More recently, the federal government announced changes to negative gearing and capital gains taxes.

Ms Girdler said she was happy the moves were aimed at getting first home buyers into the market, but felt new home owners like herself had been pushed into a precarious situation.

"It's great that investors are being pushed out a little bit. I'm very happy about that," she said.

"What I am a little cross about is the fact that nothing was done [before] this point."

Uncertainty on the horizon

While Ms Girdler did not use the government's recently expanded 5 per cent deposit scheme, the recent flatlining in property prices has pulled the program into focus.

The scheme allows first home buyers to borrow up to 95 per cent of the value of a home, within price limits, and avoid costly lenders mortgage insurance through government guarantees.

Uncertainty has been compounded with the government estimating that its tax changes will see prices grow by about 2 per cent less in the next couple of years compared to no tax changes.

Buyers who take advantage of the lower deposits, where they avoid costly lenders mortgage insurance and loans are guaranteed by the government, are more vulnerable to falling into negative equity when house prices decline.

Treasurer Jim Chalmers said he was not worried about those who had recently purchased property and were at risk of falling into negative equity.

"Well, no, because housing is long-term investment," he told the ABC on Tuesday.

"To the extent that we can get more first home buyers into the market, that's a good thing."

The scheme has been used by more than 260,000 people since 2022, and government data suggests 59 per cent of participants have a deposit larger than 5 per cent.

Only 13 loans have been taken over by the government since the scheme was first introduced in 2020.

Cotality research director Tim Lawless said instances of negative equity were likely to be rare, but he said it was unclear when the property market might recover.

"I think instances of negative equity are fairly scarce, but of course there are going to be individual examples where property has fallen further," Mr Lawless said.

He said property market jitters were often countered by policy changes, pointing to the early months of the COVID-19 pandemic where some thought the "sky is falling".

"That simply didn't happen because interest rates dropped to 0.1 per cent and we saw a whole amount of fiscal support roll through," Mr Lawless said.

Mr Lawless said he could not see a policy response on the horizon to combat the current decline.

"The trajectory of an increase is really uncertain, given we probably won't see a lifeline thrown to property markets," he said.

He said multifaceted issues outside of the latest federal budget, like inflation, interest rates and consumer sentiment, were likely to push down on prices for some time.

Independent economist Saul Eslake said negative equity was an issue for those who did not plan on holding their homes for long.

"Now, that's only a problem if you're planning to sell it," he said.

"So, it's really only a problem if you lose your job, or if the family breaks down and you have to sell for either of those reasons."

PM defends tax reforms

Prime Minister Anthony Albanese used Question Time on Tuesday to point at reports of auctions being attended exclusively by first home buyers as proof that the proposed changes to negative gearing and capital gains tax were already working.

Coupled with the 5 per cent deposit scheme, Mr Albanese said it was becoming easier for first home buyers to enter the market.

Lara Harris, a Melbourne real estate agent referenced by the prime minister in parliament, told the ABC there had been a shift from investors to first home buyers at auctions in her area over the past three to four weeks.

"We had multiple bidders and all of them being first home buyers, which is good to see," she said.

"We're not seeing really any investors in the market at the moment," she said.

But Ms Harris said there was high demand from first home buyers for properties below $1 million, but there was a lack of stock in the market.

Shadow Minister for Housing and Homelessness Andrew Bragg seized on this issue on Wednesday.

He said the government's version of the 5 per cent deposit scheme had become a "wrecking ball" for the market accessible to first home buyers.

"House prices are too high for young people and must come down."

He said the program should be capped and means tested to target low-income earners, as it was when the Coalition first introduced the scheme.