The Reserve Bank has rejected suggestions coming from some quarters that around 10 per cent of mortgage borrowers are in negative equity.
A review of house price falls and negative equity in RBA’s latest Financial Stability Review says the incidence of negative equity in Australia remains low and is unlikely to present a risk to broader financial stability.
The RBA estimates that just over 2 per cent of borrowers are in negative equity (around 2.75 per cent of loans by value), where the outstanding balance of the loan exceeds the value of the property it is secured against.
The highest rates of negative equity are in Western Australia, the Northern Territory and Queensland, while the rates in New South Wales, Victoria, Tasmania and the ACT are below 1 per cent.
Queensland, Northern Territory and Western Australia account for 90 per cent of all mortgage debt in negative equity. These states have regions that experienced large and persistent house price falls over several years, when the mining boom came to an end.
The RBA’s figures are drawn from securitised loan portfolio data.
Negative equity creates risks for borrowers and lenders. Borrowers who lose their job or suffer a fall in income for some other reason are more likely to default if their loan is in negative equity.
A borrower having difficulty making loan repayments who has negative equity cannot fully repay the debt by selling the property. Lenders are more likely to bear losses in this situation.
The RBA says that even if house prices were to fall significantly further and negative equity became more widespread, the risk of increased defaults is low if current employment trends continue.
“Some private surveys estimate closer to 10 per cent of mortgage holders are in negative equity. However, these surveys are likely to overestimate for a number of reason; for instances, by not accounting for offset balances.”
The RBA says other reasons some surveys may have overestimated the level of negative gearing that that they have not accounted for the big increase in property prices that preceded recent falls and a decline in the share of mortgages issued with high loan-to-valuation ratios in recent years.
House prices in some parts of Sydney and Melbourne have fallen 20 per cent from their peaks in mid to late 2017. But only a small share of owners purchased at peak prices.
Few recent borrowers have high starting LVRs. Over the past five years the share of loans written by ADIs with LVRs above 90 per cent has halved and has averaged around 7 per cent. Around 1.25 per cent of mortgages have current LVRs between 95 and 100 per cent.
Around 70 per cent of loans are estimated to be at least one month ahead of their repayment schedules, with around 30 per cent ahead by two years or more.
Around 10 per cent of loans in negative equity have interest-only terms expiring in 2019. For these borrowers, the increase in repayments from moving to principal and interest terms may be difficult to manage.
This is unlikely to represent a risk to broader financial stability, given it remains largely restricted to mining-exposed regions and represents a very small share of mortgage debt, the RBA says.
Negative equity peaked in the United States at 25 per cent of mortgaged properties in 2012, with peak to trough price falls exceeding 30 per cent. In Ireland, where the peak to trough fall in house prices was more than 50 per cent, negative equity exceeded 35 per cent.