More than 34,000 Australians who purchased their first home under the federal government’s 5 per cent deposit scheme could be at risk of slipping into negative equity as Australia’s housing market continues its sharp downturn.

Fresh property data shows national dwelling values fell by 0.7 per cent during July, marking the largest monthly decline since December 2022 and extending the current housing correction to four consecutive months. Analysts estimate the combined value of Australia’s residential property market has fallen by around $230 billion over that period.

The downturn has raised particular concern for younger Australians who entered the market using Labor’s expanded Home Guarantee Scheme, which allows eligible buyers to purchase a property with a deposit of as little as 5 per cent while avoiding lenders mortgage insurance through a government guarantee.

Housing Australia says more than 34,000 first-home buyers accessed the scheme between October 2025 and March 2026. With an average purchase price of approximately $646,000, many buyers entered the market with deposits of around $32,000 while borrowing the remaining 95 per cent of the property’s value.

Negative equity occurs when a property’s market value falls below the outstanding balance on the mortgage. Although homeowners can continue making repayments without immediate consequences, selling the property or being forced to refinance can become significantly more difficult because the sale proceeds may not fully repay the loan.

Investment bank Morgan Stanley has warned Australia’s housing market could decline by as much as 10 per cent as it adjusts to changing market conditions, including the impact of recent property tax reforms, weaker investor demand and higher borrowing costs. A fall of that magnitude would reduce the value of an average home by roughly $65,000—more than double the typical deposit paid by many first-home buyers under the scheme.

Coalition analysis argues that many of the approximately 34,000 recent participants in the 5 per cent deposit program would therefore find themselves in negative equity if prices fall as forecast.

Opposition figures have accused the Albanese government of exposing younger Australians to greater financial risk by expanding low-deposit home ownership while property prices were becoming increasingly vulnerable to a market correction. They argue that encouraging highly leveraged borrowing leaves new buyers with little financial buffer if values decline.

The government rejects suggestions that the program has created a widespread financial crisis.

Ministers have repeatedly pointed to historically low mortgage default rates and argue the Home Guarantee Scheme has enabled hundreds of thousands of Australians to achieve home ownership earlier than would otherwise have been possible. They also note that negative equity does not automatically mean a borrower is in financial distress, particularly if repayments remain affordable and the property is held over the long term.

Economists similarly caution that negative equity is not the same as mortgage default. A homeowner who remains employed and continues meeting repayments can often ride out temporary declines in property values until the market recovers. The greatest risks emerge when borrowers are forced to sell because of unemployment, illness, relationship breakdown or significant increases in repayment costs.

The latest market weakness follows a prolonged period of rapid growth in Australian housing values, during which affordability deteriorated significantly for many aspiring homeowners. Rising interest rates over recent years have reduced borrowing capacity while increasing mortgage repayments, placing additional pressure on household budgets.

Property analysts say the current correction reflects several factors occurring simultaneously. Higher financing costs have reduced buyer demand, investor confidence has softened following recent tax changes, and an increase in homes listed for sale has shifted bargaining power back towards purchasers.

Some of Australia’s largest housing markets are expected to experience the steepest falls.

National Australia Bank recently revised its housing outlook, forecasting prices across the major capital cities could decline by around 5 per cent over the coming year, with Sydney and Melbourne potentially recording falls of up to 10 per cent if current conditions persist.

Housing market specialists stress that while falling prices create challenges for existing homeowners, they may improve affordability for future buyers who have been locked out of the market during years of rapid price growth.

The long-term success of Labor’s Home Guarantee Scheme is therefore likely to depend not only on how many Australians are able to purchase homes, but also on whether those buyers can maintain financial stability throughout changing market conditions.

For recent purchasers, the coming months will be closely watched. If property prices stabilise, many may avoid slipping into negative equity altogether. However, should values continue falling in line with the more pessimistic forecasts, thousands of highly leveraged first-home buyers could find themselves owing more on their mortgages than their homes are worth.

Despite the growing political debate surrounding the issue, economists generally emphasise that Australia’s labour market, household incomes and future interest-rate movements will ultimately play a greater role in determining whether negative equity develops into a broader financial problem.

With housing affordability remaining one of the country’s most significant political and economic issues, the performance of the property market is expected to remain a major focus heading into the months ahead, particularly as governments continue balancing support for first-home buyers with concerns about financial stability.