 Negative equity for home owners
Few home owners actually experience negative equity in their homes, even when house prices fall. That's the claim by Luci Eillia, the head of the Reserve Bank of Australia's Financial Stability Department.
She believes that Australia's housing market is well placed to come through the global economic crisis relatively well. N
Due to a robust tax and regulatory framework, Australian households by and large have a healthy financial buffer against falls in house prices, compared with their counterparts in the US, she said.
"In the US, some private-sector estimates suggest that more than 10 per cent of mortgage borrowers are already in negative equity, perhaps as many as one in six,” she said. “Thus, a much greater proportion of US homeowners risk defaulting if they get into repayment difficulty."
Negative equity occurs when the market value of a home falls below the value of the outstanding mortgage.
Many homeowners are keeping their repayments high, despite interest rate cuts in a bid to pay off the mortgage sooner and pay less interest.
In doing so, they accumulate potential redraws that serve both as precautionary saving and an additional buffer of equity against falls in housing prices.
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