Key Highlights

  • The RBA estimated that less than 1% of borrowers were in negative equity.
  • The median borrower can cover over a year of scheduled Mortgage payments from savings buffers.
  • Housing prices have declined since their March peak, which is a key risk to watch.
  • The estimate predates the November rate rise and will be updated in the next Review.

Housing prices are falling faster than the Reserve Bank expected, yet its latest stability assessment put the share of mortgage holders owing more than their home is worth at under 1 per cent.

What happens to a mortgage when the property behind it loses value? For most borrowers, very little in the short term: repayments stay the same and the Loan keeps running down. The risk becomes sharper only when a home's value falls below the outstanding Debt – a position known as negative equity, or being "underwater". The Reserve Bank of Australia's October 2026 Financial Stability Review (FSR) estimated that "less than 1 per cent of borrowers" were in that position.

Negative equity in plain terms

Equity is the difference between what a property is worth and what is owed on it. A borrower with a home valued above the loan balance has positive equity, a cushion that belongs to them. If prices fall far enough, or if the loan was large relative to the purchase price to begin with, that cushion can disappear and turn negative.

Negative equity is not, on its own, a crisis for a household that can keep up repayments. Nobody has to realise the loss unless they sell. The difficulty arises when Negative equity coincides with something else going wrong – a Job loss, a sharp rise in costs, or a need to move. In those cases, selling the home may not raise enough to repay the loan, leaving the borrower with a debt and no property. That combination is what concerns financial stability analysts, because it is where losses for both households and lenders tend to emerge.

A housing slide that ran ahead of forecasts

The negative equity estimate matters more than usual right now because the price backdrop has been weakening. The RBA's November 2026 Statement on Monetary Policy (SMP) says "housing prices have declined by more than expected", and that "Housing prices have declined further from their peak in March".

The SMP also describes overall financial conditions as "judged to be restrictive, but with various cross-currents". Higher borrowing costs are one part of that: on 3 November the Monetary Policy Board raised the cash rate target by 25 basis points to 4.85 per cent, from 4.60 per cent. Government bond yields, which influence longer-term borrowing costs, are described as "around their highest levels in many years".

When prices fall, the first borrowers to approach negative equity are typically those who bought most recently with small deposits, since they have had the least time to build up equity through repayments or past price growth. The aggregate figure, though, suggests that group remained small as at the October review.

Why the number has stayed low

Several features of the RBA's assessment help explain why falling prices had not, as at October, pushed many borrowers underwater.

  • Low overlap with cash-flow stress. The FSR estimated that the share of variable-rate owner-occupier borrowers with a cash-flow shortfall "increased a little over the first half of 2026, but remains relatively low at around 2 per cent."
  • Savings buffers. The median borrower can cover "over a year of scheduled mortgage payments at current interest rates" from buffers, according to the FSR.
  • A small affected share. With fewer than one in a hundred borrowers in negative equity, even a group facing both strained finances and no equity cushion would be a small fraction of the total.

The RBA's summary judgement was that "Most borrowers appear well placed to manage ongoing cost pressures amid declining housing prices." Its broader view was: "Our latest assessment is that the Australian financial system remains resilient, but there's no room for complacency."

What could move the figure

The FSR estimate is a snapshot. Published on 1 October 2026, it predates the November rate rise and the price movements recorded since then. Three developments would be worth watching for anyone tracking how the number evolves.

House prices. Negative equity responds directly to prices. The SMP language – declines "by more than expected" and "further from their peak in March" – indicates the trend had not reversed when the forecasts were finalised on 28 October.

Employment. Negative equity becomes a problem mainly when it meets an income shock. The SMP overview notes that "The Unemployment rate rose by more than expected to average 4.6 per cent in the September quarter" and forecasts it to rise "to a bit over 5 per cent by end-2028". The Economic Conditions chapter adds that employment growth "held up in the September quarter as expected", with the rise in unemployment largely reflecting higher-than-expected labour Supply – a less worrying source than widespread job losses.

Interest rates. Higher rates raise repayments on variable loans and can weigh on prices. The forecasts assume a cash rate path that "increases by 35 basis points by mid-2027, before declining a little to stabilise at 4.8 per cent in 2028", based on market pricing. That is an assumption, not a commitment by the Board, which says it "will continue to do what it considers necessary to bring Inflation sustainably back to target."

The next FSR, scheduled for 25 March 2027, will update the estimate with data covering a period of falling prices and a higher cash rate.

The bottom line

Being underwater on a mortgage is uncomfortable but not, by itself, a default. It becomes a stability issue when it overlaps with an inability to keep up repayments. The RBA's October assessment found both conditions affecting small minorities of borrowers – under 1 per cent in negative equity and around 2 per cent of variable-rate owner-occupiers in cash-flow shortfall – supported by sizeable median buffers. With housing prices declining more than expected and unemployment forecast to drift higher, the March 2027 review will show whether that small minority has stayed small.