 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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