Reserve Bank of Australia reveals how one in three home borrowers could fall into negative equity

One in three home borrowers could soon owe their bank more than their house is worth.

The Reserve Bank of Australia is so concerned about this phenomenon, known as negative equity, that it has issued a warning about it. 

When property prices fall, borrowers who lose their job or fall sick are often hit with a financial catastrophe.

They are forced to sell their house or apartment at a significant loss, which means they still owe their bank tens or even hundreds of thousands of dollars even though they no longer have an asset.

Presently, less than four per cent of mortgages across Australia are in negative equity.

In Western Australia and the Northern Territory, more than 19 per cent of borrowers are in negative equity.

The RBA has warned this could rise to 33 per cent if real estate estate values continued to plummet in those parts of Australia.

‘Over half of all loan balances in negative equity are in Western Australia and the Northern Territory,’ it said in its Financial Stability Review for October 2019.

‘If housing prices in Western Australia and the Northern Territory were to fall further, the share of loan balances in these states that are in negative equity would increase substantially. 

‘A further 10 per cent decline in housing prices in Western Australia and the Northern Territory is estimated to result in the share of loan balances in negative equity in these regions increasing from a little under one-fifth to over one-third.’

When property prices fall, borrowers who lose their job or fall sick are often hit with a financial catastrophe. They are forced to sell their house or apartment at a significant loss, which means they still owe their bank tens or even hundreds of thousands of dollars even though they no longer have an asset (pictured are houses in Sydney)

During the past year alone, Perth’s median house price has dived by nine per cent while Darwin’s equivalent values have fallen by 11.3 per cent, CoreLogic data showed.

By comparison, Sydney’s median house price fell by 5.1 per cent in the year to the end of September compared with 5.9 per cent in Melbourne.

While the Sydney and Melbourne property markets are recovering from a record downturn, Perth prices have been falling for the past five years, following the end of the mining boom. 

Compounding the situation is higher unemployment.

Presently, less than four per cent of mortgages across Australia are in negative equity. In Western Australia and the Northern Territory, more than 19 per cent of borrowers are in negative equity. The RBA has warned this could rise to 33 per cent if real estate estate values continued to plummet in those parts of Australia

Western Australia has a jobless rate of 5.8 per cent, which is significantly higher than the national average of 5.3 per cent. 

With fewer mining engineering jobs than a decade ago, wages have been falling. 

The RBA said rising unemployment could see more borrowers default. 

‘Declines in income have historically been a key reason for households defaulting on their loans,’ it said.

‘Although the bank’s central forecast is for the unemployment rate to remain broadly unchanged for some time, if the unemployment rate were to rise, the risks associated with negative equity would increase. 

‘About one-half of all mortgages currently in negative equity are estimated to be in areas where the unemployment rate has risen over recent years.’