RBA Warns of Mounting Global Risks as Negative-Equity Pockets Grow Among New Home Buyers

Australia's financial system is resilient but increasingly exposed to shocks from abroad, the Reserve Bank warned on Thursday, as its twice-yearly health check flagged negative-equity pockets among recent home buyers and an AI debt-financing cycle turning "more opaque and circular."

Resilient at home, exposed abroad

The October Financial Stability Review finds that "Australia's financial system has a good degree of resilience, but global and operational vulnerabilities continue to mount," the central bank said in its release. Most mortgaged households "remain well placed to manage more difficult conditions, even if housing prices were to fall sharply," most businesses should cope with elevated costs, and Australian banks "are well positioned to continue lending, even in a downturn."

Behind the resilience call: the post-pandemic house-price run means most owners hold positive equity, most mortgagors have built large savings buffers, arrears remain low, and lending standards have stayed high since the regulator's 3% serviceability buffer. The share of owner-occupier borrowers facing a cash-flow shortfall sits around 2%.

The principal risks, the RBA says, are increasingly coming from abroad: "High sovereign debt, high asset prices and growing leverage make global markets vulnerable to a sharp and potentially disruptive adjustment," with geopolitical tensions and rapid technological change adding complexity. "Australia won't be immune to global disruptions if they were to occur," the bank's In Brief summary says - "financial, geopolitical or operational shocks or some combination of them."

The negative-equity pockets

Fewer than 1% of borrowers are in negative equity - owing more than their property is worth - but the bank says recent buyers are most exposed, "including first home buyers participating in the Australian government 5 per cent deposit scheme." Just over 100,000 first-home buyers have used the scheme since it opened to higher earners last October. APRA data for the September quarter shows loans with 95% or greater loan-to-value ratios hit a record $15.6 billion, up 62.6% on the previous nine months.

RBA modelling suggests that if house prices fell a further 20%, around 5% of mortgages would fall into negative equity. In a harsher scenario - inflation running at 7% - about one in twenty borrowers would be at risk of default, according to the review's modelling as reported by The Bull. The context: the cash rate has risen 100 basis points this year to 4.60%, a 13-year high, after Tuesday's quarter-point hike, and real disposable income per person fell in the first half of 2026 on higher inflation and rising rates. The deepest mainstream forecasts, including HSBC's Paul Bloxham, see peak-to-trough price falls around 13%.

The AI debt warning

The sharpest language is reserved for the global AI investment boom. A shift in sentiment toward the boom, "increasingly debt-funded and fuelled by expectations of rapid earnings growth, is a potential trigger for international economic turmoil," the review says. The debt-financing cycle underpinning AI investment is becoming "more opaque and circular," and "threats to international financial stability continue to mount." Reserve Bank assistant governor Brad Jones warned that elevated global asset prices and growing public and private debt leave markets "vulnerable to a sharp and disruptive decline." The RBA notes AI's long-term financing runs to hundreds of billions in debt and equity.

The review also flags operational fragility: banks and other critical institutions are growing more vulnerable to cyberattacks, and AI itself is "making the cyber threat landscape more challenging." On private credit - where a property developer has collapsed and a large fund has blocked redemptions - the RBA is sanguine: the sector is a small fraction of business debt and financial-system assets, and the problems are unlikely to reach the broader banking system. The review alludes to the fund without naming it; TickerGrove reported on September 30 that A$40 billion Metrics Credit Partners had frozen redemptions.

The market read

Markets heard a central bank in no hurry to declare victory. The ASX 200 fell 1.99% on Thursday. Bond futures moved to price roughly a 35% probability of one further hike to 4.85% before early 2027. NAB sees 4.60% as the peak; ANZ still expects a final quarter-point rise in November to 4.85%. There is no RBA meeting in October; the next decisions land November 2-3. The RBA itself has signaled it would rather accept slower near-term growth than let elevated inflation embed in wage and price setting.

The November test

What to watch: whether the November 2-3 meeting delivers the ANZ-tipped final hike or the NAB pause; whether house-price declines stay inside the RBA's comfort zone - a 20% fall is the line where negative equity stops being a pocket problem; and whether the AI-sentiment trigger the RBA fears stays theoretical. For now, the central bank's message is steady: the system can take the hit, but the hits are increasingly coming from places Canberra cannot control.