‘Disastrous’ prediction for thousands of new homeowners amid market downturn

Tens of thousands of Australians are staring down the barrel of a housing horror show, with experts warning a potential downturn could send new homeowners into negative equity.

Negative equity occurs when homeowners owe the bank more than their home is worth, meaning they would be unable to sell their property for a profit.

WATCH VIDEO ABOVE: Housing downturn puts new buyers in danger

Those who bought homes under the government’s 5 per cent deposit scheme are particularly vulnerable, experts say. About 300,000 people have taken advantage of the scheme since its inception in 2020.

Appearing on Sunrise on Tuesday, Sydney auctioneer and property market analyst Tom Panos said there’s a strong possibility of a 10 per cent downturn in the property market and gave an example of how negative equity could have a devastating impact on buyers.

“You buy a property for a million dollars, you’ve borrowed 95 per cent, you put 50 grand in. The property drops from being worth a million to say $900,000, but you owe the bank $950,000; that is negative equity,” Panos said.

What makes the situation harder, Panos said, is that “if you’re struggling to make the loan repayments and then you sell it, you’ll be selling it at a loss. That is devastating if you’re a young person, because to make up losing $50,000 plus the interest and the legal fees, stamp duty, whatever you’ve paid, it can become a very, very disastrous experience as a young couple.”

‘Mortgage prison’

Personal finance expert Betsy Westcott warned that approximately 22,900 people who purchased homes between October and February — when the 5 per cent deposit scheme was expanded to include all first home buyers regardless of income or property price — are in the “real danger zone” of negative equity.

“For those that have recently bought, it’s a very real danger,” Westcott said on Sunrise.

Homeowners caught in negative equity face what Westcott described as “mortgage prison” — being forced to either sell while still owing the bank money, or stick it out and continue to pay down the debt.

“It’s not fun, just like it sounds,” she said, adding that rising interest rates make the situation even more precarious by increasing mortgage costs.

Buyers advised to think long term

Panos said a market downturn is likely for several reasons.

“We’ve got a number of factors happening at the one time. The war, the budget, interest rates have gone up three times and look like they’re going to go up again,” Panos said.

“All this means that sentiment is down. Borrowing capacity is down and the absolute possibility of negative equity is there, mainly for people that have borrowed the most amount of money.”

Despite fears a downturn could trigger an economic crisis, Treasurer Jim Chalmers has defended the market correction as necessary for housing affordability.

“Our job here is not to target a particular price outcome, our job here is to make sure that there are more affordable options for first homebuyers to get a toehold in at what has been historically a really difficult market,” Chalmers said told ABC Radio on Tuesday.

“For too long, the intersection of the tax system and the housing market has locked too many Australians, particularly young Australians, out of housing, and that’s why we’re taking some of these difficult decisions to address that problem.”

Chalmers has suggested falling clearance rates could open up the market for young Australians, but Panos noted the biggest price drops aren’t occurring in areas where first home buyers typically shop.

Using Sydney as an example, Panos noted price drops are occurring in more expensive areas such as “the Eastern Suburbs, in Woollahra, in Bellevue Hill, in Neutral Bay.

“I can’t see first home buyers actually upgrading into a property in Point Piper,” he said.

Panos advised potential buyers to think long term, suggesting a horizon of three to 10 years rather than one to three years.

“Even if we get a price correction of 10 per cent, if you can wait it out for a couple of years, that property will go up,” he said.

“You’ve got to buy the property, put the contract in your drawer and be prepared not to be looking at it for at least a few years.”

Panos predicted the downturn could eventually reach the lower-priced end of the property market, particularly in regional areas where investors have built large portfolios.

“I do see the whole market eventually being impacted and that does mean the lower price point,” he said.