Falling prices test first-home buyers who entered with small deposits

Falling home values are exposing the trade-off at the heart of buying with a small deposit: it can shorten the wait to enter the market, but it leaves little equity to absorb a downturn.

Analysis published on Saturday by realestate.com.au found substantial price declines among homes eligible for the Australian Government 5% Deposit Scheme in parts of Sydney, Melbourne and Brisbane.

The figures require careful interpretation. Property research platform SuburbData examined price movements among homes below the scheme’s local price caps. It did not identify the purchase price, current loan balance or financial position of every buyer who actually used the scheme.

Even so, the results illustrate why recent buyers with high loan-to-value ratios are more exposed when prices fall soon after settlement.

Sydney and Melbourne show the greatest exposure

The national analysis reported that 41.9 per cent of Sydney properties below the scheme’s price cap had lost more than 5 per cent of their value between October 2025 and August 2026. The average decline among those properties was estimated at about $83,000.

A separate Melbourne breakdown found nearly half of eligible properties had lost more than the equivalent of an initial 5 per cent deposit, with an average decline of $59,284 among that group. About 85 per cent of eligible Melbourne properties recorded some decline, although the estimated falls varied widely between areas.

In Brisbane, SuburbData estimated that 24.3 per cent of eligible properties had fallen by more than 5 per cent. The Cleveland-Stradbroke and Sunnybank areas recorded particularly large median movements, while other parts of the city continued to gain value.

These are suburb-level estimates rather than valuations of individual homes. The price of a particular property can perform differently because of its condition, land, position, property type and the price originally negotiated.

Negative equity restricts options rather than forcing a sale

Negative equity occurs when the outstanding mortgage is greater than the home’s current sale value. A price decline does not automatically change the loan contract or require an owner to sell.

The main difficulty arises when an owner needs to move, refinance or sell. A lender may reject a refinance if the updated valuation leaves the borrower with too little equity. Selling can also require the owner to contribute extra money if the proceeds are insufficient to clear the mortgage and transaction costs.

For an owner who can continue making repayments and remain in the property, negative equity may be temporary. Principal repayments gradually reduce the debt, while a later recovery in prices can rebuild equity.

That makes job security, emergency savings and the expected length of ownership particularly important for small-deposit buyers.

The broader mortgage system remains resilient

The Reserve Bank’s March 2026 Financial Stability Review found that high loan-to-value lending to first-home buyers had risen following the scheme’s expansion in October 2025. It said highly leveraged households were generally more vulnerable to income, expense and interest-rate shocks.

However, the RBA also estimated that less than 1 per cent of mortgagors overall were in negative equity at that time. It found most borrowers had substantial equity or repayment buffers and that mortgage arrears remained low.

The federal government told realestate.com.au that the scheme had assisted 280,000 first-home buyers and saved participants $2.3 billion in lenders mortgage insurance. It said only 15 guarantee claims had been paid, with none relating to purchases since the October 2025 expansion.

Those figures suggest suburb price declines have not yet translated into widespread defaults. They do not remove the more immediate constraints that a recent buyer can face if they need to refinance or sell during a falling market.

Buying with a small deposit needs a longer-term plan

The scheme can remain valuable for buyers who would otherwise spend years saving while paying rent. Avoiding lenders mortgage insurance can also provide a significant upfront saving.

But the price cap should be treated as a ceiling, not a recommended budget. A buyer who borrows the maximum available amount has less room for rate rises, maintenance, strata levies and changes to household income.

Before committing, buyers can ask their broker or lender to model repayments at higher rates, calculate all ongoing property costs and consider how long they could remain in the home if its value declined.

What it means for you

• A suburb-level fall does not prove that your individual property or loan is in negative equity.
• Small-deposit buyers should prioritise a cash buffer and contact their lender early if repayments become difficult.
• Avoid relying on a quick resale or refinance when deciding whether a property is affordable.
• Buyers using the scheme should negotiate on the property’s value, not work backwards from the maximum price cap.