Australian negative equity remains below 2% of borrowers: RBA

There's been plenty of speculation about the looming cliff faced by the interest only borrowers who are due to have their loans reset to the pricier principal and interest loans.

It comes as large price falls in some parts of Australia has meant some borrowers are facing negative equity – where the outstanding balance on the loan exceeds the value of the property it is secured against.

While this negative equity creates vulnerabilities both for borrowers, especially if they are selling, and their lenders, the Reserve Bank of Australia (RBA) recently noted it doesn't anticipate risk to the financial stability of the economy.

Certainly nothing like the impact of negative equity peaks in the United States at over 25% in 2012 and in Ireland at 35%, as prices fell 30 and 50% respectively.

The RBA noted around 10% of loans in negative equity have interest only terms expiring in 2019.

Loans currently in negative equity were, on average, taken out around five years ago and had higher average Loan to Value Ratios (LVRs) at origination, of around 85%.

For these borrowers, the increase in repayments may be distressing for the borrowers and for the communities they live in.

The RBA research shows that negative equity is concentrated in Western Australia, Queensland and the Northern Territory, largely restricted to mining-exposed regions.

These locations account for 90% of mortgage debt in negative equity.

The RBA maintains the low rates of negative equity outside the mining-exposed regions reflect three factors: the previous substantial increases in prices; the low share of loans written at high LVRs; and the fact that many households are ahead on their loans.

The RBA cautions that further significant housing price falls in Sydney and Melbourne would see negative equity increase, but widespread defaults are unlikely, the RBA financial stability review suggested.

Any increase the incidence of negative equity will only arise with those high LVR borrowers.

Across Australia, around 11% of national loans have a current LVR between 95 and 100%.

Housing prices in some areas of Sydney and Melbourne have fallen by close to 20% from their 2017 peak.

But the RBA review noted only a small share actually purchased at peak prices, and many experienced rises before prices fell.

Properties purchased in Sydney and Melbourne since prices peaked account for 2% of the national dwelling stock.

Properties purchased in these two cities since prices were last at current levels only account for 4.5% of the dwelling stock.

Few recent borrowers have had been allowed loans with high LVRs.

In fact, over the past five years, the share of loans with LVRs above 90% has halved.

Since 2017, it has averaged less than 7%.

Around 80% of loans are issued with an LVR of 80% or less.

Given most borrowers do not have high LVRs, housing price falls will need to be larger for widespread negative equity.

Of course, if a borrower has also paid off some of their debt then price declines will need to be larger still.

Around 70% of loans are estimated to be at least one month ahead, with 30% ahead by two years or more.

When a borrower is behind on repayments, banks classify the loan as impaired.

Currently the impaired housing loans rate sits at 0.2% of all mortgages. 

This article first appeared in The Daily Telegraph.