Negative Equity Is Rising as Australian Property Prices Cool — What Buyers and Investors Need to Know in 2026

Quick answer: Negative equity occurs when your property is worth less than the outstanding balance on your mortgage. As Australian property prices cool in 2026, a growing number of recent buyers — particularly those who purchased at peak prices with small deposits — are finding themselves in this position. It does not automatically mean disaster, but it does limit your options significantly.

Negative equity used to be the sort of phrase Australian homeowners could dismiss with a casual shrug — property only ever goes up, right? That assumption is being tested right now. As interest rates stayed elevated longer than most forecasts suggested and property prices in several major markets have softened from their 2021–2022 peaks, the number of Australian households sitting in negative equity has been quietly climbing.

This article explains exactly what negative equity means, who is most exposed, what the consequences are in practice, and — critically — what you can do about it if you're one of the people affected or worried you might be soon.

What Is Negative Equity?

Negative equity — sometimes called being "underwater" on your mortgage — happens when the current market value of your property falls below the amount you still owe your lender.

A simple example:

Item	Amount
Purchase price (2022)	$850,000
Deposit paid (10%)	$85,000
Mortgage at settlement	$765,000
Current market value (2026)	$710,000
Current mortgage balance	$738,000
Negative equity position	-$28,000

In this scenario, even if you sold the property today for its current market value of $710,000, you would still owe your lender $28,000 after paying off the mortgage — and that is before selling costs, agents' commissions, or any outstanding legal fees.

Negative equity is not the same as financial hardship, but it is a significant constraint. You cannot sell without making up the shortfall from savings or another source, and refinancing to a better rate becomes considerably harder because most lenders require a minimum loan-to-value ratio (LVR) of 80% to avoid Lenders Mortgage Insurance (LMI) — and many won't refinance you at all if your LVR exceeds 90–95%.

Why Is Negative Equity Rising in Australia Right Now?

Several forces have converged in 2026 to push more borrowers into negative equity territory. Understanding them helps you assess your own exposure.

1. Buyers Who Purchased at the 2021–2022 Peak

The Australian property market hit extraordinary highs during the pandemic era. CoreLogic data showed combined capital city values rising by more than 25% between mid-2020 and early 2022, driven by record-low interest rates and surging demand. Buyers who entered at the very top of that cycle — especially with deposits of less than 20% — started with very little equity buffer.

A 10% market correction from the peak wipes out a 10% deposit entirely and pushes that buyer into negative equity. In some unit markets in Melbourne and in outer-suburban corridors in Sydney, price falls from peak have exceeded that threshold in certain pockets.

2. Elevated Interest Rates Slowing Price Recovery

The Reserve Bank of Australia began its rate-hiking cycle in May 2022. While rates have since come down from their peak, they have remained materially higher than the near-zero environment that inflated property values. Higher borrowing costs reduce the pool of eligible buyers and therefore suppress demand — putting downward pressure on prices in markets that were already stretched.

The slowdown in price growth (and in some areas, outright declines) is most pronounced in:

Melbourne — particularly units and townhouses in middle and outer suburbs
Regional markets — areas that boomed during the remote-work exodus and are now correcting
High-density apartment markets — Sydney CBD-adjacent new builds, Gold Coast investment apartments

3. New Builds Settling Into a Weaker Market

There is a specific negative equity trap for buyers of off-the-plan properties. When you sign an off-the-plan contract, you lock in a purchase price that might be 18–36 months before settlement. If the market falls in that period — as it has in many segments — you arrive at settlement with a property worth less than the contract price you agreed to pay.

Worse, the valuation your bank performs at settlement is based on current market value, not your contract price. If the valuation comes in below the contract price, the bank will only lend against the lower value. That means you either need to top up your deposit out of pocket, or — in extreme cases — the lender may not provide finance at all, leaving you at risk of losing your original deposit and facing breach of contract action from the developer.

Important: If you are settling on an off-the-plan property in the next 6–12 months, get an independent valuation done before settlement so you are not caught off guard on the day.

4. Investors Who Relied on Capital Growth, Not Cash Flow

Many investment property buyers over the past five years used interest-only loans and relied on capital growth to justify their strategy. With growth now flat or negative in some markets, and rental yields still compressed relative to mortgage rates, the financial case for holding has weakened. Investors looking to sell are discovering that capital growth gains have partially or fully reversed.

Who Is Most at Risk?

Not all property owners face equal exposure. The groups most vulnerable to negative equity in the current environment are:

Recent first-home buyers with small deposits Anyone who purchased with a 5–10% deposit between mid-2021 and early 2023 in a market that has since fallen has very little buffer. First-home buyer scheme participants who entered with 5% deposits under the First Home Guarantee are statistically the most exposed cohort.

Off-the-plan apartment purchasers As outlined above, contract price versus settlement valuation mismatches are creating real-world negative equity situations at the point of settlement.

Investors in oversupplied unit markets Areas with high apartment stock and sluggish rental demand (particularly inner-Melbourne and some Gold Coast markets) have seen both capital values and yields deteriorate simultaneously.

Borrowers who took variable rate loans at the 2022 peak These borrowers have seen their repayments increase substantially. Some have had to extend their loan terms or reduce principal repayments, meaning they have paid down less of their principal than expected — leaving them with a higher outstanding balance than originally projected.

What Happens If You Are in Negative Equity?

Being in negative equity does not mean the bank calls your loan immediately or that you will be forced to sell. In Australia, provided you are meeting your mortgage repayments, your lender generally cannot force you to sell simply because the property's value has declined.

The real consequences are practical constraints:

You Cannot Easily Sell

If you sell a property in negative equity, you must cover the shortfall between the sale proceeds and the outstanding mortgage balance. On a $28,000 shortfall (as in the example above), plus $25,000–$35,000 in typical selling costs (agent's commission, conveyancing, and so on), you could be out of pocket $50,000–$65,000 in total. That money has to come from savings, a personal loan, or some other source.

Refinancing Becomes Very Difficult

Lenders assess refinancing applications on the current LVR. If you are in negative equity, your LVR is above 100% — no mainstream lender will refinance you, and specialist lenders who will charge significantly higher rates. You are essentially locked in to your existing lender until values recover or you pay down the balance enough to cross back above 80% LVR.

Your Borrowing Power Is Constrained

Using equity in your property to fund renovations, investment, or other goals is impossible if you have no equity to begin with. This freezes out a strategy many Australians have used to build wealth. Use the Usable Equity Calculator to understand exactly how much accessible equity you actually have — or whether you have any at all.

Selling Costs Cannot Be Covered by Sale Proceeds

This catches many people off guard. Even a property sold at exactly market value may leave you with a gap once agent commissions (typically 1.5–2.5%), conveyancing, and any outstanding rates or strata levies are factored in.

Worked Example: The Off-the-Plan Trap

Let's walk through a realistic scenario:

Scenario: Sarah buys a two-bedroom apartment off the plan in Melbourne's inner-north in March 2022 for $720,000 with a 10% deposit of $72,000. She settles in November 2024. At settlement, the bank's valuation comes back at $670,000.

Item	Amount
Contract price	$720,000
Deposit paid	$72,000
Expected loan	$648,000
Settlement valuation	$670,000
Maximum loan at 90% LVR	$603,000
Shortfall Sarah must fund	$45,000

Sarah must find an additional $45,000 out of pocket at settlement or risk losing her $72,000 deposit and facing legal action. Even if she manages to settle, she starts with a loan of $648,000 against a property worth $670,000 — an LVR of 96.7% — firmly in negative equity territory once selling costs are considered.

This scenario is playing out in real time for some purchasers right now, particularly in Melbourne's apartment market.

What Can You Do If You Are in Negative Equity?

If you're in negative equity — or worried you soon might be — here are the options available to you, in rough order of preference.

1. Stay Put and Pay Down the Mortgage

If you can continue making repayments and do not need to sell or refinance, time is your ally. Property markets are cyclical. Continuing to pay down your principal reduces your LVR over time, even if values stay flat. Making additional repayments to accelerate this — even small amounts — can meaningfully shorten the time it takes to return to a positive equity position.

2. Communicate Early With Your Lender

If you are experiencing financial hardship that is making repayments difficult, contact your lender proactively. Australian banks have hardship assistance programmes, and reaching out before you miss repayments puts you in a far stronger negotiating position than waiting until arrears accumulate.

3. Do Not Panic-Sell

Selling while in negative equity crystallises the loss and leaves you with a debt but no asset. Unless there is a compelling reason to sell (genuine financial hardship, relationship breakdown, a work relocation you cannot avoid), holding through the cycle is almost always the better outcome.

4. Avoid Taking on More Debt

Some borrowers compound their problems by drawing on credit cards or personal loans to meet mortgage repayments. This trades a secured debt (your mortgage) for expensive unsecured debt and usually makes the situation worse.

5. Consider Rental Income If Owner-Occupied

If you are in financial difficulty and own a home, renting out a room (or the entire property if you can temporarily live elsewhere) is a way to generate income that reduces the mortgage pressure. This has tax implications — speak to a registered tax agent about what changes when you rent out part of your primary residence.

6. Seek Professional Advice Early

Financial counselling in Australia is available for free through the National Debt Helpline (1800 007 007). If your situation is complex, a licensed financial adviser or mortgage broker can help you understand your options in your specific circumstances.

The Broader Market Outlook

It is worth noting that widespread negative equity at the scale seen in some overseas markets — Ireland in 2010, the United States during the GFC — is not the likely scenario for Australia. Several structural factors limit the depth of any correction:

Strong population growth from immigration is underpinning rental and owner-occupier demand
Supply constraints — Australia is still undersupplying new housing relative to population growth
Low unemployment — most borrowers remain employed and able to service their loans
APRA (Australian Prudential Regulation Authority) serviceability buffers — lenders have been required to stress-test borrowers at 3 percentage points above the actual loan rate, meaning most borrowers who passed credit assessment can theoretically service their loans at materially higher rates

That said, specific segments — certain apartment markets, recent high-LVR borrowers, off-the-plan purchasers in oversupplied corridors — face genuine risk of remaining in negative equity for several years.

How to Check Your Equity Position

Before you can take any action, you need to know where you stand. Here's how to assess your current position:

Get a market appraisal — ask two or three local agents for a written appraisal of your property's current value. This is free and gives you a realistic figure.
Check your loan balance — log in to your lender's portal or call your lender to get the current outstanding balance.
Calculate your LVR — divide the loan balance by the property value and multiply by 100. Above 80% means no refinancing without LMI. Above 100% means negative equity.
Use a calculator — the Usable Equity Calculator makes this calculation straightforward and also shows you how much equity is accessible (usable equity is typically capped at 80% of value minus the outstanding loan).

If you own an investment property and want to stress-test the overall return including current values, the Property Investment Return Calculator lets you model different scenarios including falling capital values.

A Note on Investment Properties Specifically

For investment property owners, negative equity interacts with tax in specific ways that are worth understanding.

If you sell an investment property at a loss — that is, for less than the original purchase price — you realise a capital loss, not a capital gain. Capital losses in Australia can be carried forward indefinitely and used to offset future capital gains. They cannot be used to offset ordinary income (salary or wages).

This means a loss-making sale does not generate a tax deduction in the year of sale. The loss is preserved but only useful when you have a future capital gain to offset it against. If you're uncertain about the tax treatment of your investment property position, use the Capital Gains Tax Calculator to estimate different sale scenarios and their tax outcomes.

Frequently Asked Questions

What is negative equity in simple terms?

Negative equity means your property is worth less than what you still owe on your mortgage. If you sold today, the sale proceeds would not be enough to pay off the loan — you would still have debt remaining after the property was gone.

Can a lender force you to sell if your property falls into negative equity in Australia?

Generally no — as long as you are meeting your repayments, Australian lenders cannot force a sale simply because the property value has declined. However, if you default on repayments, the lender can take possession and sell the property, leaving you responsible for any shortfall.

How common is negative equity in Australia in 2026?

It is rising but remains a minority experience. The borrowers most exposed are those who purchased with small deposits at market peaks between 2021 and 2023, particularly in Melbourne's unit market and in some regional areas that experienced sharp pandemic-era price surges. Precise figures vary by source and suburb.

Does negative equity affect your credit score?

Being in negative equity itself does not affect your credit score — it is an asset-to-debt position, not a credit event. However, if negative equity leads to missed repayments or default, those events will significantly damage your credit history.

Is negative equity the same as being in mortgage stress?

No, they are related but different. Mortgage stress typically refers to spending more than 30% of gross income on home loan repayments. You can be in mortgage stress with positive equity (if prices rise but repayments are high) or in negative equity without mortgage stress (if prices fall but your income comfortably covers repayments). Both are problematic but in different ways.

What is the difference between negative equity and a capital loss?

Negative equity is a current balance sheet position — it exists as long as your debt exceeds your asset's value. A capital loss is realised only when you sell the asset for less than you paid for it. You can be in negative equity and never realise a capital loss if values recover before you sell.

Should I sell an investment property if it goes into negative equity?

This depends entirely on your personal financial situation, cash flow, tax position, and outlook for the market. As a general principle, selling into a falling market crystallises the loss, whereas holding allows for potential recovery. This is a decision worth discussing with a licensed financial adviser who can assess your specific circumstances.

Related Calculators and Guides

Usable Equity Calculator — find out how much equity you can actually access from your property
Property Investment Return Calculator — stress-test your investment property returns across different price scenarios
Capital Gains Tax Calculator — estimate your CGT liability if you do decide to sell
Negative Gearing Calculator — understand the tax impact of holding a loss-making investment property
Mortgage Calculator — model different repayment scenarios and see how extra repayments reduce your balance faster
Stamp Duty Calculator — factor in entry costs when reviewing your total investment position
Investment Property Cash Flow Calculator — assess whether your property is generating positive or negative cash flow right now

Property market figures and conditions described in this article are based on conditions current as at September 2026 and change regularly — always verify the current situation before acting.

This article is for general information only and does not constitute financial, tax or legal advice. Individual circumstances vary. Consult a registered tax agent or licensed financial adviser before making decisions based on this information.