Government-backed loan schemes could push first-time buyers into negative equity

An expected 2023 price reversal in the housing market of more than 10 per cent could see Australians using lending schemes lose value in their homes.

Using calculations based on Westpac's 14 per cent price dip by the end of 2024, first-time buyers using a 5 per cent deposit schemes in Canberra, Sydney and Melbourne will move backwards in total equity held within their asset.

Property price falls put into question the effectiveness of government-backed programs in a potential downswing and whether the Commonwealth should be backing loan schemes which could put first home buyers in a worse financial position.

Negative equity is a precarious position, where the amount owed on a mortgage is bigger than the market price of the property.

READ MORE:

RateCity research director Sally Tindall said the scheme's implementation during a price peak, followed by a downturn, could seriously test the financial security of a number of home buyers who would also be facing rising interest rates in the coming years.

"Helping first home buyers into affordable, secure housing is important, however, encouraging people to buy at inflated prices with next-to-no buffer in the face of rising interest rates comes with some pretty serious risks," Ms Tindall said.

"While most new buyers should be able to ride out a drop in the property market, people buying today with a small deposit won't have a decent buffer to fall back on. This means if they hit a rocky patch and can't meet the mortgage repayments, they could risk losing both their equity and their home."

Calculations conducted by RateCity on behalf of Australian Community Media showed the equity stake for a resident accessing the scheme would move from 5 per cent back to 1 per cent by the end of 2024.

Westpac's touted price fall would see a first home buyer in Sydney slide down to an equity position of negative 4 per cent. For an $800,000 home that translates to a $108,400 loss by the end 2024.

In Melbourne, the move into negative equity was even more pronounced, with a person accessing the scheme now facing an investment fall to negative 5 per cent over the same period.

A $700,000 home in the nation's second largest city would lose $101,220 in value.

Only properties purchased in Adelaide, Brisbane and Perth would see rises in equity held.

More than 50,000 Australians have accessed first home deposit lending schemes since its inception.

Loans are administered through the Commonwealth's National Housing Finance and Investment Corporation, which also provides other schemes such as the family home guarantee, which allows single parents to access mortgages with a 2 per cent deposit.

The remaining 15 to 18 per cent of the deposit is backed by the federal government.

NHFIC recently published a report showing housing affordability for first-time buyers had worsened due to surging prices in both metropolitan and regional Australia.

Ms Tindall noted the risk of moving into negative equity was largely for people still looking to buy.

A number of mortgage holders who have already accessed the scheme would be experiencing a rise in equity due to recent house price increases, she said.

Home buyers also face pressures of rising interest payments, with the Reserve Bank expected to hike the cash rate as early as this year.

Ms Tindall said the scheme would allow for a home to be purchased sooner, but warned prospective buyers needed to weigh up the potential ramifications falling prices and rising rates would have on their ability to service the debt.

"Buying with a 5 per cent deposit means a person's loan size is significantly larger than if they had bought with a 20 per cent deposit," she sad.

"This means when interest rates rise, their repayments will go up by more. If property prices then drop, people using this scheme are also likely to be locked into their lender and their guarantor for longer."

Canberrans with a $500,000 mortgage are expected to see their repayments jump up by an additional $428 a month.

The ACT's house price fall is based on the average price forecast of the five major capital cities.

Economists at National Australia Bank are expecting a price fall of 10 per cent by 2023, while Commonwealth Bank is forecasting an 8 per cent decline over the period.

ANZ has predicted a 6 per cent drop for 2023.