Further housing price falls could leave a number of borrowers vulnerable to degraded housing equity, to the point of becoming negative, the Reserve Bank of Australia has warned.
Nationally, housing prices were found to be 7 per cent below their late 2017 peak, although they are still nearly 30 per cent higher since the start of 2013.
The price drops have been driven by weaker demand in conjunction with increasing supply, the RBA said in its latest Financial Stability Review.
The ongoing surge in the supply of apartments, particularly in Sydney and Melbourne, was singled out to place further downward pressure on prices.
“It is unusual, in Australia and internationally, for property prices to be falling while interest rates and unemployment are low,” said RBA.
“The prevalence of negative housing equity is low, but substantially larger price falls would see a large share of households’ housing equity eroded or even turn negative.”
Despite the sizeable drops, few loans are currently in negative equity, with the price falls occurring after previous substantial increases in the market, the report said, and as many households are ahead on their loans and a low share of loans are written at high loan-to-valuation ratios (LVRs).
Nationally, the RBA has said around 2.75 per cent of securitised loans are in negative equity, based on the its Securitisation Dataset. Some private surveys estimate that close to 10 per cent of mortgage holders are in negative equity.
The Reserve Bank added that further significant drops in Sydney and Melbourne would increase the incidence of negative equity, but it was unlikely to become widespread in the Australian market.
Queensland, Western Australia and the Northern Territories account for around 90 per cent of all mortgage debt in negative equity. Rates of negative equity were low in other states.
Around 60 per cent of loans in negative equity were found to be in Western Australia or in the Northern Territory.
“These states have regions that experienced large and persistent housing price falls over several years,” the RBA said.
“This has often been coupled with low income growth and increases in unemployment, which have reduced the ability of borrowers to pay down their loans.”
While measures of financial stress among households are generally low, there has been an increase in housing loan arrears rates, with the upswing being the largest in WA.
The Reserve Bank cited the decline in mining-related activity in the state, which has seen local housing prices fall for nearly five years and unemployment on the rise.
The central bank noting the tightening in the supply of housing credit from improved lending standards playing a part in weakened demand.
Housing credit growth also slowed in the six months leading to February, with investor credit hardly growing at all.
Household debt remains at a high level, although the Reserve Bank said most households appear to be in a good position to service their debt.
“Most households have enough equity in their property such that even much larger price falls than seen to date would still leave the value of their homes greater than their debt,” the review noted.
“However, high household debt does increase the vulnerability of households and the financial sector to a sharp deterioration in economic conditions.
“Indebted households could curtail consumption in response to income shocks or uncertainty, which would compound economic weakness and so indirectly affect the financial system.”
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