Negative Equity in Melbourne Property? Prices Are Falling. Should Owners Panic?When Will the Market Recover?
Updated: Sep 7
Updated August 2026
Negative equity is usually not a crisis unless the owner also has a cashflow problem or needs to sell.
For some recent buyers in Melbourne and Australia, particularly those who purchased with small deposits, such as the government's 5% Home Deposit Scheme, near the top of the market, the recent fall in property prices means something uncomfortable: negative equity.
"Negative Equity in Melbourne Property" sounds dramatic. Mass media and social media love to make it worse, by capitalising on this topic with a half-story to attract readership. But here at Concierge Buyers Advocates, we are not after readership. Our loyal followers follow us for neutral, independent analysis and reviews of Melbourne property market. And we will stay this way.
Negative equity does not automatically mean financial disaster. We will discuss this negative equity situation and explain why most owners need not panic. However, the more important questions are:
Can the owner still afford the mortgage?
Do they need to sell?
How much equity did they start with?
What sort of property did they buy?
And how long can they afford to hold?
In many cases, the biggest mistake owners can make is not buying before the downturn. It is panicking during the downturn. This panic causes irrational decisions, which we need to avoid.
What is Negative Equity?
Negative equity occurs when the outstanding mortgage is greater than the current value of the property. Some media also call this a sensational "mortgage Prison".
For example:
A buyer purchases a home for $800,000 with a 5% deposit. The mortgage is approximately $760,000. If the property subsequently falls 7% in value, it may now be worth around $744,000. The owner may technically owe more than what the property is worth. On paper, they have negative equity. Remember, this is on paper. The biggest mistake owners can do is to convert this into actual paper loss.
This does not automatically mean the bank will demand the difference. If the borrower continues to service the mortgage, has stable income and does not need to sell, negative equity can remain largely a temporary balance-sheet issue. The real danger is when negative equity occurs during a financial distress. That is when things become serious and messy.
When should Melbourne owners actually worry about Negative Equity?
There is a big difference between an owner whose home has fallen temporarily in value and an owner who is becoming financially trapped. The most vulnerable owners are usually those who combine several risks.
1. Very small initial deposits
Owners who purchased with 5% deposits can lose their equity very quickly. A relatively modest fall in property prices can wipe out most or all of their initial contribution.
2. Recent buyers with Negative Equity in Melbourne Property
Owners who purchased during 2025 or early 2026 would likely have had little time to repay principal or benefit from long-term capital growth. They are therefore much more exposed to short-term price falls.
3. Borrowers under mortgage stress
Negative equity becomes far more dangerous when the owner is already struggling with repayments. A temporary paper loss is one thing. Being unable to service the mortgage is a different story. If you find yourself in a potential repossession situation. It may be time to work with your lender. Our insights into the repossession process and how to avoid it may be helpful to you.
4. Owners who need to refinance
Falling property values can push the loan-to-value ratio higher. This alone, can make refinancing harder and potentially reduce access to competitive interest rates. And if it happens in a rising interest rates environment, it can make refinancing very difficult.
5. Forced sellers
Divorce, unemployment, illness, business problems or other circumstances can force owners to sell at exactly the wrong point in the cycle. This is where negative equity can turn into an actual financial loss.
Should Owners Sell their House in Negative Equity Situation?
Generally, no. If you can comfortably afford your repayments, have stable income and intend to hold the property for several years, panic-selling into a falling market usually makes little sense.
A lower valuation today does not usually determine the value of the property in five or ten years. With the exception of a few, most property markets move in cycles. The key issue is whether you have enough financial resilience to stay through that cycle.
Owners should think of their situation using a simple traffic-light system.
Green | Amber | Red |
In this situation, the best course is often simply to continue paying down the mortgage and allow time to work. |
This is the time to strengthen cash reserves, review the loan structure and create a contingency plan. |
In this situation, early action matters. The owner should speak to their lender and professional advisers before circumstances remove their ability to control the timing of a sale. |
What should owners have done to avoid getting into this negative equity situation?
If you're already in a negative equity situation, stay put, and hope for the best, while servicing your mortgage.
To avoid getting yourself into a negative equity situation in future, picking the right property. Pre-purchase due diligence and the first few years after buying are important. Your property should have built enough equity in it, to quickly reduce your LVR, and thus building enough buffer to cushion any downturn.
What is the "right property"?
The right property depends a lot on your budget, goals, and risk appetite. A tired weatherboard house might be the right property for a developer, but it may not be right for a first home buyer. Similarly, a brand new house might be right for a owner occupier home buyer, it may not make sense for a developer.
If you are unsure what the "right property" looks like for you, get a no obligations consultation with our buyers advocates.
Our purchases for our high LVR first home buyers in the recent 2 years have built between 15-25% prior to Budget Night 2026 in May. Other than one, they are all currently still maintaining that 15-25% growth, putting our clients in a comfortable situation, and avoiding negative equity.
How can Owners Limit Their Exposure to Negative Equity?
The objective is simple: Buy time and protect cashflow.
Build a financial buffer
Owners should prioritise liquidity. Extra cash in an offset account can reduce mortgage interest while remaining accessible if circumstances change.
Pay down principal where practical
Reducing the mortgage gradually improves the loan-to-value ratio (LVR). Even small extra repayments compound over time. Utilise your off-set account to reduce interest rates. Such savings compound over time as well
Review Your Mortgage Early
Do not wait until financial pressure becomes severe. Speak to the existing lender about rates, loan structure and available options. Refinancing can become harder after property values have already fallen significantly.
Stress-test the Household Budget
Ask some uncomfortable questions.
What happens if interest rates remain high for another year?
What happens if income drops?
What happens if a major expense appears?
What happens if an interest-only period ends?
The earlier these scenarios are considered, the more options an owner usually has.
Avoid Panic Renovations
One of the worst reactions to falling property values is assuming money must immediately be spent on improvements. Spending $100,000 because the property has supposedly lost $100,000 does not automatically restore that value. It seldom work this way during a downturn. Ask any property renovation-flipper.
Renovations should still pass the same investment test they would in a rising market. In fact, the test criteria should be stricter. You might not even recover the dollar value that you put into the renovation.
Avoid Relying Too Heavily on Automated Valuations
Not every property falls by the suburb average. A quality home in a tightly held street can perform very differently from a compromised property nearby. Melbourne is not one market. Neither is Glen Waverley, Bentleigh, Ringwood, Doncaster or Ivanhoe. Property-specific factors still matter enormously.
If you are keen to get your property appraised so you understand your equity situation, consider getting a property appraisal.
When will Property Prices Recover from the Effects of Budget 2026?
Some market commentators and our lead buyers advocate, Rayson, speculated that the current price soft spot was engineered to work hand in hand with the revised Capital Gains Tax (CGT) framework. Under this theory, if property values dip significantly in the short term, the tax office can maximize future CGT revenue when prices eventually rebound off a lower cost base under the new indexation and minimum tax rules.
How Credible is this Theory?
The logic driving this theory hinges on the timeline of the recent tax overhaul:
The Resetting of the Cost Base: With the removal of the flat 50% CGT discount for established properties (replaced by CPI cost-base indexation and a 30% minimum tax starting 1 July 2027), an asset’s valuation as of 2026/2027 sets the baseline for future taxable capital growth.
Maximizing Future Revenue: If property prices soften now—driven by immediate buyer hesitation over negative gearing limits on established homes—future growth is calculated off a much lower initial valuation floor. When the market inevitably recovers, a larger portion of the long-term price expansion becomes subject to CGT, boosting government coffers in the 2030s.
When Will Australian Property Prices Recover?
While short-term policy shocks create headwinds, Australian property history shows that fundamental supply-and-demand metrics usually outweigh tax adjustments within 12 to 24 months.
Phase 1: The Adjustment Window (2026 – Early 2027)
Expect continued price stagnation or modest declines, particularly in investor-heavy unit markets and established suburban houses, as investors absorb the loss of negative gearing on non-new builds.
Phase 2: The Pivot to New Dwellings & Supply Bottlenecks (Mid 2027)
Because negative gearing remains fully intact for new builds, investor capital will aggressively turn to house-and-land packages, off-the-plan developments, and Build-to-Rent projects. This in itself is going to create a different issue. This article explains and shows you why.
Phase 3: The Broader Market Recovery (Late 2027 – 2028)
Recovery in established home values will be triggered by structural factors that tax policy cannot change: persistent population growth, a severe underlying housing deficit, and a drop in major development completions. Once buyers recalibrate to the new tax environment, underlying demand will push prices back upward.
When will Melbourne Property Prices Recover?
This is where property owners in Melbourne need realistic expectations. A market can stop falling long before owners recover their previous value. The current Melbourne downturn may continue through part of 2026 and potentially into 2027.
A reasonable base case is that the market begins stabilising during 2027, particularly if interest rates peak and the market becomes confident that the next major move in rates will eventually be downward. A more meaningful recovery could then develop later in 2027 and into 2028.
But that does not mean every property will recover at the same pace. High-quality, scarce family homes in established suburbs may recover much faster than generic apartments, poor-quality townhouses or compromised stock.
Effects of November 2026 Victorian Elections on Melbourne Property Prices
The wild card for Melbourne and Victoria is the November 2026 Victorian State Elections. If the elections results in a change in government, this could flip the market quickly. Remember, investors are driven my expectations. And there are strong expectations that the oppositions will reverse the toxic property taxes. The Liberal parti has committed to revert the toxic property taxes for investment properties. The other anti-investment levies, taxes and overheads are also expected to be reviewed. If the right opposition wins the elections, Victoria and Melbourne, in particular, can see a early recovery.
What does it Take to Recover From the Fall in Property Prices?
Depending on the property and the location, fallen values may take 2 years, 5 years, 10 years or may never recover. A sharp fall does not always mean a sharp rise.
The other important mathematical reality is, it takes more to recover from a fall. If a $1 million property falls 10%, it becomes worth $900,000. It then needs to rise by approximately 11.1% to return to $1 million. If it falls 15%, it becomes worth $850,000. It then needs to rise about 17.6% to recover.
And if you want to be true to definition with numbers, you need to factor in the inflation and historical equity growth during the period to derive at the proper definition of "recover".
This is why owners should not assume that one strong year of price growth will automatically reverse a meaningful downturn. Neither should property owners assume the sharper the fall, the sharper the rebound. For some recent buyers, the realistic holding period could be several years. And for those who bought the wrong properties, they may never recover from the fall.
What will determine the Melbourne recovery?
Interest rates will probably be the biggest driver. Next, would be a reversal of anti-property ownership / investment taxes and levies in Victoria.
However, property markets do not wait for the Reserve Bank to announce multiple rate cuts. They respond to expectations. Once buyers become convinced that the rate-hiking cycle is finished, politics are changing and borrowing conditions are likely to improve, sentiment can change quickly.
Some of the early signs includes auction clearance rates rise, inspections become busier as buyers return. Vendor expectations will start to improve and competition increases.
This is how things work, cycle after cycle. The best buying opportunities often occur before the recovery becomes obvious in the headlines, NOT when the press announce a recovery. If you are waiting for the mass media, you would typically by 6-9 months LATE. Prices would have started recovering 6-9 months before it is reflected in the data, the trend, and before the press can confirm this.
What Does this Mean for Melbourne Buyers?
While falling markets create risk, they also create opportunities. Buyers often have more choice, less competition and greater negotiating power. And buying well becomes even more important.
In a rising market, buyers can sometimes be rescued by general market growth. In a falling market, poor property selection becomes much more visible.
The lesson is simple:
A falling market is not necessarily a bad time to buy. It is a bad time to buy the wrong property at the wrong price.
Experienced property selection, due diligence and negotiation become more valuable when the market is uncertain, not less.
The bottom line
Most Melbourne owners with negative equity should not panic. The real danger is not negative equity itself.
The danger is:
negative equity + weak cashflow + an inability to hold or
negative equity + panic selling.
In times like this, owners who can continue servicing their mortgage and maintain a financial buffer have something extremely valuable on their side: time.
And buyers currently looking at buying Melbourne properties should understand the other side of the cycle. Periods of uncertainty often produce the best negotiating conditions. By the time everyone agrees the market has recovered, that advantage may already be gone.
If you are considering buying in Melbourne and want to understand where value is emerging, which properties are likely to remain resilient and where the risks are hiding, Concierge Buyers Advocates can help you assess the opportunity before committing.
We combine market analysis, property-specific due diligence and experienced negotiation to help buyers make confident decisions in both rising and falling markets.
FAQ
Can you have negative equity on a home in Australia?
Yes. Negative equity occurs when the mortgage balance exceeds the current market value of the property.
Will the bank force me to sell if I have negative equity?
Generally, negative equity alone does not trigger a forced sale if mortgage repayments continue to be made. Problems arise when the borrower can no longer service the loan.
Should I sell if Melbourne property prices are falling?
Not necessarily. Owners with stable income, manageable repayments and a long holding period may be better positioned to hold rather than crystallise a temporary loss.
When will Melbourne property prices recover?
No forecast is certain, but a reasonable base case is for stabilisation during 2027, with a broader recovery potentially extending through 2027–2028 depending heavily on interest rates, inflation and employment.
Is a falling Melbourne property market a good time to buy?
Potentially. Falling markets can provide buyers with greater choice and negotiating power, although property selection and price discipline become more important.
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