Fewer than one in a hundred Australian mortgage holders currently owe more than their home is worth, and the Reserve Bank's modelling suggests that even a further one-fifth drop in prices would push only around one in twenty loans underwater.

Negative equity is one of those terms that tends to surface whenever housing prices fall. It describes a borrower whose outstanding loan is larger than the value of the property securing it. With housing prices now declining in most capital cities, the Reserve Bank's October 2026 Financial Stability Review (FSR) put a number on how widespread the problem is today, and how it might change under a severe shock.

The answer, according to the review released on 1 October: negative equity affects "less than 1 per cent of borrowers" now. Under a further 20 per cent fall in housing prices, "only around 5 per cent of mortgages would fall into negative equity".

Where prices are now

Housing prices have turned down during 2026. The Monetary Policy Board's 29 September statement said housing prices had fallen in most capital cities and that new housing loans had declined noticeably. The August Statement on Monetary Policy reported that national housing prices were down 1.6 per cent from their March peak at that time.

Assistant Governor (Financial Markets) Christopher Kent described the shift in more detail on 13 August: "Housing prices have declined in Sydney and Melbourne, with declines becoming increasingly broad-based." He also noted that "forward indicators such as auction clearance rates have also declined to be below their long-run averages," and that "tax changes announced in the federal budget appear to have contributed to reduced demand in the established housing market."

The backdrop includes four increases in the cash rate target this year, from 3.60 per cent to 4.60 per cent. Kent observed that "housing credit growth, which moves closely with housing prices, has started to slow."

Why so few borrowers are underwater

Important context for why negative equity remains rare is the size of the price gains that came before the recent declines. Governor Michele Bullock told the House of Representatives Standing Committee on Economics on 18 September that "housing prices are still around 50 per cent higher than they were in early 2020." She added: "Housing prices have fallen in most capital cities and new housing loans have declined," but "the share of borrowers in negative equity remains very limited".

In general terms, a borrower who bought several years ago has had both that cumulative price rise and their own principal repayments working to build equity. By the same logic, borrowers who bought more recently, or with smaller deposits, have had less time for price growth or repayments to do that work, which leaves them more exposed if prices keep falling.

Reading the stress scenario

The FSR's estimate that around 5 per cent of mortgages would fall into negative equity under a further 20 per cent price fall is a hypothetical calculation, not a forecast. It is designed to show how the housing loan book would look after a severe shock.

Even so, the jump is worth understanding. Moving from less than 1 per cent to around 5 per cent represents a several-fold increase in the share of affected loans. The same 20 per cent fall in housing and commercial property prices is one element of the RBA's bank stress test, which also assumes a 3 per cent fall in GDP, a cash rate rising to 5.6 per cent and unemployment climbing to 6.3 per cent. In that scenario, the banking system's CET1 capital ratio falls from 12.4 per cent in June 2026 to "around 11.6 per cent", and the RBA judges banks would remain well positioned to keep lending.

It is also important to separate negative equity from distress. A borrower in negative equity who keeps up their repayments, and who does not need to sell, may never crystallise a loss. In general, problems arise when negative equity combines with a loss of income or a forced sale. The FSR's household figures help gauge that second risk:

  • Cash-flow shortfalls: around 2 per cent of variable-rate owner-occupier borrowers, projected to stay "a little under 2 per cent for some time".
  • Buffers: the median borrower is able to cover over a year of scheduled mortgage payments from offset and redraw accounts.
  • Arrears: loans 90 or more days behind have risen slightly but remain around pre-pandemic levels.
  • Very adverse scenario: the share of mortgagors at higher risk of default rises to about 5 per cent.

The FSR media release summed up the position by saying most mortgage households are well placed to cope even with a sharp fall in house prices, while noting some pockets of stress.

What would drive a larger fall

A further 20 per cent fall is a scenario, not an RBA forecast. The forces acting on housing are nonetheless visible in its recent commentary. Higher interest rates have lifted repayments, which Kent said in August were "close to their 2024 peak as a share of household disposable income". Bullock said on 29 September that mortgage payments were "back up sort of around 10 per cent of" disposable income, comparing that with "when we had interest rates at 4.35 per cent, so they'll go up a bit further."

The Board's September statement described the effects of the housing downturn as uncertain. It also made clear that inflation remains the priority. Headline inflation was 3.9 per cent over the year to the June quarter and the monthly CPI indicator showed 4.0 per cent for August, while the trimmed mean measure of underlying inflation was 3.6 per cent in the June quarter. The Board judged "a further tightening of financial conditions" was warranted.

The bottom line

Negative equity is currently rare in Australia, affecting less than 1 per cent of borrowers at a time when prices remain, in Bullock's words, "around 50 per cent higher than they were in early 2020" despite this year's declines. The RBA's modelling suggests a further 20 per cent fall would lift that share to around 5 per cent of mortgages, a significant increase but still a minority of loans.

The RBA treats this as a test of resilience, not a prediction. Whether prices fall further will depend on many factors, including interest rates. The Board's next decision is due at 2.30 pm on 3 November, and Bullock has made clear she is "not going to give you forward guidance".