First-time homebuyers with large mortgages face highest risk of negative equity, RBA warns

SYDNEY, 2 OCTOBER 2026 —

Australia’s housing market holds firm despite rate hikes, but first-home buyers with large loans face growing negative equity risk, RBA warns

According to the central bank’s latest financial stability review, fewer than one in 100 mortgage holders currently owe more on their homes than the properties are worth, but the risk is concentrated among those who entered the market during the pandemic boom with minimal equity buffers.

The RBA’s assessment underscores a stark contrast between the broader market’s stability and the precarious position of a subset of borrowers. While the majority of Australian homeowners have benefited from years of price appreciation, leaving them with substantial equity cushions, the central bank warns that a sharp downturn—such as a 20% property price crash—could push around 5% of mortgages into negative equity.

This vulnerability is particularly acute for first-home buyers who availed themselves of the federal government’s 5% Home Guarantee Scheme, a program designed to help buyers purchase properties with deposits as low as 5%. The RBA notes, however, that the share of these borrowers falling behind on payments has so far remained "contained", though the long-term implications of sustained price declines and higher borrowing costs remain unclear.

The central bank’s findings are drawn from its biannual financial stability review, which paints a mixed picture of household resilience. While most indebted homeowners are managing higher mortgage repayments—despite wages failing to keep pace with inflation—the review highlights that less than 2% of mortgaged households lack sufficient income to cover essential expenses and loan repayments.

This figure, the RBA states, is "roughly unchanged" from six months prior and well below the peak of nearly 5% observed in 2024. The bank attributes this relative stability to strong labour market conditions, as well as the equity and savings buffers accumulated by many borrowers over time.

"While some households continue to experience hardship, the estimated share of mortgagors in severe financial stress or in arrears has, so far, remained low," the report states. "Negative equity is insufficient to trigger default if borrowers remain able to service their loans, which remains the case for the vast majority of these households." The RBA’s caution, however, extends beyond domestic housing risks.

Its review warns that global financial stability threats are mounting, with high valuations in corporate debt and equity markets leaving them exposed to a "disorderly" correction. Among the most pressing concerns is the potential unwinding of the artificial intelligence (AI) investment boom, which the bank describes as increasingly reliant on "sustained rapid earnings growth" and a "debt-financing cycle that is becoming more opaque and circular."

Governor Michele Bullock previously signalled concerns about AI-driven asset bubbles, a warning reiterated in the latest review. The RBA notes that Australia is unlikely to be immune to broader market turbulence, particularly if sentiment shifts abruptly. Geopolitical tensions—including the ongoing conflicts in Ukraine and the Middle East, as well as "intensifying strategic competition among major powers"—further amplify these risks.

Additionally, the central bank has flagged rising cybersecurity threats, some facilitated by AI advancements, and the potential for a sudden sell-off in global bond markets as key external vulnerabilities.

The review’s release coincides with a period of heightened economic uncertainty, as Australian property markets—particularly in Sydney and Melbourne, where price declines have been most pronounced—grapple with the aftermath of aggressive monetary tightening.

The RBA’s data suggests that while the majority of borrowers remain protected by equity buffers built up over decades, the first-home buyer cohort now faces the highest risk of negative equity, a development that could strain household finances if prices continue to fall.

The central bank’s assessment also serves as a reminder that Australia’s financial stability is increasingly intertwined with global risks, from AI-driven market distortions to geopolitical flashpoints, none of which are confined to domestic borders.

For Malaysian and regional observers, the RBA’s findings carry broader implications. Australia’s housing market, long a barometer of economic health, has served as a cautionary tale for other nations grappling with property bubbles and monetary policy tightening. The central bank’s emphasis on loan-to-value ratios and equity buffers resonates particularly in Southeast Asian markets, where similar dynamics—such as high household debt levels and exposure to property cycles—pose risks to financial stability.

Meanwhile, the RBA’s warnings about global debt markets and AI-driven asset bubbles align with growing concerns in Asia, where rapid digital transformation and geopolitical tensions are reshaping economic vulnerabilities.

The next phase of the RBA’s analysis will likely focus on whether the current resilience of Australian households can withstand further price declines or external shocks. With global financial conditions remaining volatile, the central bank’s next financial stability review—due in early 2027—will be closely watched for any signs of worsening stress among borrowers, particularly those on the periphery of the market.

For now, the RBA’s message is clear: while the system holds, the risks are not evenly distributed, and the most recent entrants to the housing market remain the most exposed.

Related: Reserve Bank of Australia (RBA) · Michele Bullock