Relatively few Australian households face going into negative equity, even if housing prices do fall somewhat, the head of the Reserve Bank of Australia’s Financial Stability Department, Luci Ellis, says.

Unlike their American counterparts, Australian households have more of a financial buffer against falls in housing prices because of tougher lending standards and differences in tax and regulatory framework.

“In the United States, 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, because they cannot easily sell or refinance if the mortgage is worth more than the home.”

Australia’s taxation system does not allow households to deduct the interest on their own home’s mortgage against their tax “so they are not effectively encouraged to keep their mortgage balances high”, Ms Ellis said.

Many Australian households pay off more than they have to. In doing so, they accumulate potential redraws that serve both as precautionary saving and an additional buffer of equity against falls in housing prices