Housing prices have slipped in most capital cities, but the Reserve Bank's October Financial Stability Review finds negative equity remains rare, and models how that could change under a much deeper fall.

Negative equity occurs when a borrower owes more on a home loan than the property is worth. It matters when housing prices fall, because it limits a borrower's options if they need to sell, and can increase potential losses for lenders if a loan goes bad.

According to the Reserve Bank of Australia's (RBA) October 2026 Financial Stability Review, released on 1 October, negative equity is currently below 1 per cent of borrowers. The review also ran a hypothetical: in a 20 per cent fall in housing prices, "around 5 per cent of mortgages would fall into negative equity".

Those two numbers frame the RBA's latest read of the issue: limited exposure today, and a measurable but still minority exposure under a severe price shock.

Where housing prices stand

The context is a housing market that has turned, but from a high base. The RBA's recent communications trace the shift:

  • 13 August: Assistant Governor (Financial Markets) Christopher Kent said "Housing prices have declined in Sydney and Melbourne, with declines becoming increasingly broad-based", with monthly national price growth about -0.5 per cent for three months.
  • August minutes (10–11 August meeting): national housing prices had fallen about 1½ per cent from their March peak, but were still about 5 per cent above a year earlier. The decline was attributed to rate rises, Budget tax changes and weaker sentiment.
  • 8 September: Deputy Governor Andrew Hauser said house prices were about 3 per cent higher than a year earlier and nearly 50 per cent higher than at the start of the decade.
  • 14 September: Assistant Governor (Economic) Sarah Hunter said "house prices in the regions have not declined as much on average as they have in the bigger cities".
  • 18 September: Governor Michele Bullock told a parliamentary committee that housing prices had fallen in most capitals, new lending had declined, prices were still about 50 per cent higher than in early 2020, and negative equity was limited.
  • 29 September: the Monetary Policy Board's statement said housing prices have fallen in most capital cities and new housing loans have declined noticeably.

Those cumulative gains provide context for the low figure: many borrowers who bought several years ago would retain an equity cushion even after recent declines. The pressure point is more likely to be among recent buyers with small deposits, though the review's material cited here does not break the negative equity figure down by purchase date.

Why 20 per cent matters

The 20 per cent scenario is not a forecast. It is a stress assumption, and it is the same magnitude the RBA's review applied in a separate stress test of the banking system, in which housing and commercial property prices fall 20 per cent, unemployment rises to 6.3 per cent and the cash rate rises to 5.6 per cent. In that test, banks' Common Equity Tier 1 (CET1) capital ratio fell from 12.4 per cent in June 2026 to around 11.6 per cent, and the review said banks could absorb losses while continuing to extend credit.

For households, the scenario suggests about one in 20 mortgages would move into negative equity if prices fell by a fifth. That is a notable increase from below 1 per cent, but it also implies that the large majority of mortgages would retain positive equity even under a severe shock.

Two other findings from the review help explain why the exposure is contained:

  1. High-LVR lending remains limited. The share of high loan-to-valuation (LVR) lending has risen since the expansion of the Government's 5% Deposit Scheme, but the review says it "remains low overall". Loans with small deposits are the ones most likely to tip into negative equity when prices fall.
  2. Problem loans are well secured. Over 90 per cent of housing non-performing loans were well secured as of June 2026, broadly meaning the property backing them is sufficient to cover what is owed.

Negative equity and stress are not the same thing

A borrower in negative equity who can keep making repayments is not necessarily in distress. The risk rises when negative equity coincides with a cash-flow problem, because selling may not clear the debt.

On that front, the review found the share of variable-rate owner-occupiers with a cash-flow shortfall "remains relatively low at around 2 per cent", with most of those able to cover it from savings for at least six months. Severe stress "will remain well below its 2024 peak", it said.

The cost of servicing debt is still elevated, however. Kent noted in August that "Scheduled mortgage payments have risen and are now close to their 2024 peak as a share of household disposable income." Since then, the Board has raised the cash rate again, by 25 basis points to 4.60 per cent on 29 September, bringing total tightening in 2026 to 100 basis points.

Rates, supply and the price outlook

The RBA is clear that it is not trying to steer house prices. "Monetary policy does not target housing prices", Bullock told the committee on 18 September. She also pointed to a longer-running factor: "Fundamentally, there is a structural undersupply in the housing market, which has underpinned prices over recent years."

At her media conference on 29 September, Bullock repeated the point, "we have a structural under supply of housing", adding: "It's possible the housing downturn may make that worse." Hunter, for her part, said of housing: "We know interest rates are part of that story. We don't think that's the whole story."

The RBA has not published a forecast for house prices in the material cited here, and the Board's next decision, due at 2.30 pm on 3 November, has not been signalled.

The bottom line

The RBA's latest read is that fewer than 1 per cent of borrowers are in negative equity, a low figure that sits against large price gains since early 2020. Its stress scenario shows the share would rise to around 5 per cent of mortgages in a 20 per cent price fall: material, but far from a majority. With high-LVR lending still low overall and most problem housing loans well secured, the review frames negative equity as a contained risk today, while making clear how a much deeper downturn would change the picture.