RBA’s Michele Bullock reveals share of homeowners in negative equity if house prices fell 20 per cent

The RBA’s new second-in-charge has revealed how many households with a home loan would be in negative equity if property prices fell 20 per cent — and it’s probably nothing like what you’d expect.

A house price fall of 20 per cent would push just 2.5 per cent of households with a home loan into negative equity, the Reserve Bank of Australia says.

The claim was made in a speech on Tuesday by RBA deputy governor Michele Bullock, in which she also said that even if the cash rate were to rise by a total of three percentage points from recent record lows it would have “limited impact” on a third of variable-rate borrowers.

Ms Bullock concluded that “as a whole, households are in a fairly good position” as rates rise, having built up “substantial equity” courtesy of extra repayments and asset price increases.

She said RBA analysis based on loan data “suggests that a decline in housing prices of 10 per cent would raise the share of balances in negative equity to 0.4 per cent, which is still much lower than its peak of 3.25 per cent in 2019.

“Even a fall of 20 per cent in housing prices would only increase the share of balances in negative equity to 2.5 per cent.

RBA deputy governor Michele Bullock. Picture: John Feder

“This low incidence of negative equity reduces the likelihood that borrowers will enter into default, as well as the size of losses incurred by lenders if they did,” Ms Bullock said.

The RBA has also analysed the impact on borrowers if cash-rate increases totalled 300 basis points.

Financial markets predict this will happen by mid next year.

Already, the cash rate has been raised by 125bp since May, from a record low of 0.1 per cent.

And on Tuesday, ANZ Bank economists forecast a further 200bp of hikes by November, via four more 50bp increases.

Ms Bullock, who became the RBA’s 2IC in April, said “the data suggest that over one-third of variable-rate borrowers have already been making average monthly loan payments — including irregular payments to redraw and offset accounts — sufficient to meet the resulting rise in required repayments.

“In other words, there is limited impact on these borrowers.

“On the other hand, just under 30 per cent of borrowers would face relatively large repayment increases of more than 40 per cent of their current payments,” she said.

In a Q&A after her speech, Ms Bullock also said that “I fully expect that in the next couple of years you will start to see regulatory regimes” for stablecoins.