The Reserve Bank has warned that if property values continue to fall, especially in Sydney and Melbourne, it might push some borrowers into “negative equity”.

This is an undesirable situation in which the sum owing on a homeowner’s mortgage is greater than the value of the property.

But If the housing correction worsens, it could potentially put more landowners in that predicament, the RBA said in its six-monthly financial stability review.

The RBA was also concerned that substantially larger price falls would see a large share of families’ housing equity eroded or even turn negative.

The central bank said the incidence of negative equity in Australia remains low, with just over 2 per cent of Australian borrowers in that circumstance.

The Highest rates of negative equity now are found in Western Australia, Queensland and the Northern Territory, after the wind-back of the mining boom, the lender said.

Rising unemployment would raise the risk of costly defaults for creditors, compounding the marginally tighter availability of charge seen thus far.

If families cut back on spending in reaction to “income shocks”, there might be a compounding of economic weakness which will”influence the financial system”, the RBA said.

However, the RBA noted housing prices would need to fall “significantly further” for equity to become widespread, and stated a meagre unemployment rate of 4.9 per cent was an essential element in limiting mortgage defaults.

The fallout from the housing correction comes following property prices dropping in some areas Of Sydney by up to 20 per cent amid expectations of worse falls to come.

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