In the first Financial Stability Review for 2019, the RBA has taken an in depth look at the recent property market downturn and how the trend is continuing to spur the issue of negative equity.
The report has stated:
" A borrower having difficulty making loan repayments who has negative equity cannot fully repay their debt by selling the property.
Negative equity also implies that banks are likely to bear losses in the event that a borrower defaults.”
There is an increasing likelihood that negative equity could become quite widespread throughout the Australian property market, should values decline even further.
The RBA have also said that currently, 2.75% of securitized loans by value are in negative equity- this represents just over 2% of borrowers.
"The highest rates of negative equity are in Western Australia, the Northern Territory and Queensland, where there have been large price falls in areas with high exposure to mining activity. Almost 60% of loans in negative equity are in Western Australia or the Northern Territory”.
The RBA have also said that high-density apartment developments could exacerbate price cycles because of their long planning and development processes.
So when prices rise rapidly, developers will pay the higher prices for land, whilst investors and buyers are eager to buy off-the-plan units.
"The large increase in supply, however, ultimately sows the seeds of a decline in prices, which, if large enough, results in development becoming unattractive, new supply falling and the cycle starting again”.
Weaker apartment market conditions may encourage selling by investors struggling to meet their mortgage payments or those who want to limit potential capital losses in an environment of falling prices”.
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Wednesday, 17 April 2019