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Despite recent falls in home prices across most capital cities, the RBA's October Financial Stability Review estimates that less than 1 per cent of mortgage holders are in negative equity.

Falling house prices tend to raise one particular worry for home owners: what happens if the loan ends up bigger than the property? The Reserve Bank of Australia's (RBA) October 2026 Financial Stability Review (FSR), released on 1 October, offered a clear answer for the market as a whole. It found "less than 1 per cent of borrowers estimated to owe more on their loan than the value of their property".

Put another way, fewer than one in every 100 mortgage holders is in negative equity. That finding is one of the reasons the RBA concluded that "Most Australian households with mortgages remain well placed to manage more difficult conditions".

Why negative equity matters

A borrower is in negative equity when the outstanding balance of their home loan is larger than the value of the home that secures it. On its own, that does not cause a problem for a household that keeps making repayments and has no need to sell. The risk emerges when negative equity combines with something else going wrong.

If a borrower in negative equity loses income and needs to sell, the sale may not raise enough to repay the loan, leaving a debt even after the home is gone. That reduces the options available to a household in difficulty. For lenders, it means a loan that goes bad is more likely to produce a loss.

That is why the RBA tracks negative equity alongside measures of cash flow. A household with positive equity and a temporary cash-flow problem has more room to manoeuvre than one whose loan already exceeds the value of its home.

Governor Michele Bullock highlighted both measures in her opening statement to the House of Representatives Standing Committee on Economics on 18 September: "The share of borrowers in negative equity remains very limited and only a small share are facing severe difficulty with their loan repayments."

Prices have slipped, but from a high base

The low level of negative equity is notable because home prices have been falling. Bullock told the committee that housing prices have fallen in most capital cities. Assistant Governor (Economic) Sarah Hunter described the recent housing downturn as being around 3 per cent on The Pay Off podcast on 22 September.

The context is a long run of earlier gains. Bullock told MPs: "Housing prices are still around 50 per cent higher than they were in early 2020." Hunter similarly said a downturn of around 3 per cent is modest given prices rose about 50 per cent from late 2019.

That history helps explain the FSR's finding. With prices still around 50 per cent above early-2020 levels, a fall of around 3 per cent comes off a much larger earlier rise. As a matter of arithmetic, borrowers who have held their homes through that period have had time to build equity through both price growth and repayments, so a modest decline does not wipe that equity out.

It is worth being clear about the RBA's role here. Bullock told the committee: "Monetary policy does not target housing prices." The Board's stated focus is to "bring inflation sustainably back to target", and home prices are not a goal in themselves.

Equity is only one line of defence

Negative equity is a balance-sheet measure. The FSR pairs it with measures of how households are coping month to month.

  • Cash flow: the share of variable-rate owner-occupier borrowers whose income does not cover scheduled repayments and essential expenses "increased a little over the first half of 2026, but remains relatively low at around 2 per cent".
  • Savings: offset and redraw balances leave "the median borrower able to cover over a year of scheduled mortgage payments at current interest rates from these buffers".
  • Arrears: the share of loans 90 or more days in arrears increased a little over the year to date but remains around pre-pandemic levels.

Together, these suggest that most borrowers have both equity in their homes and savings to draw on. A household with both has more options if it hits a temporary setback.

The RBA's severe stress scenario – in which the "unemployment rate increases to 6.3 per cent, inflation increases to 7 per cent, and the cash rate rises to 5.6 per cent" – estimates that the share of mortgagors at higher risk of default would rise to around 5 per cent. According to the Review, that is only a little higher than the 2023 peak.

What could change the picture

The negative equity share is a snapshot. It depends on what happens to prices and to loan balances from here.

Interest rates are one influence on the housing market. The RBA's Monetary Policy Board raised the cash rate target by 25 basis points to 4.60 per cent on 29 September, its fourth increase this year. Bullock noted at her media conference that "it can take 12, perhaps even 18 months" for the full effect of rate changes to flow through.

The Review also noted that housing credit growth has eased recently, particularly for investors, and that the interest-only share of lending has increased over the past year – which, by itself, the RBA said is not cause for concern. Loan balances matter for equity as much as prices do, because equity is simply the gap between the two, and a loan on interest-only terms is not being paid down during that period.

The bottom line

The FSR estimates that less than 1 per cent of borrowers owe more than their home is worth – fewer than one in 100. Recent price falls in most capital cities have been modest against gains of around 50 per cent since early 2020, so most borrowers still hold a meaningful equity buffer.

Combined with a cash-flow shortfall share of around 2 per cent and strong median savings, that low level of negative equity underpins the RBA's view that most mortgage holders can manage tougher conditions. What to watch: home price movements across capital cities and the Board's next decision at 2.30 pm AEDT on 3 November.