The problem is, as every retail banker knows, that the number of people falling behind on their mortgage repayments rises sharply when people lose their jobs.

The Reserve Bank says that its analysis indicates that "for every one percentage point increase in the unemployment rate, the mortgage arrears rate increases by about 0.8 percentage points".

In anticipation of the likely rise in mortgage stress caused by the jump in joblessness, the major banks have announced that they will allow loan repayments to be deferred for up to six months.

Precarious situation

But the Reserve Bank highlights another risk. Demand in the residential property market has already fallen in response to the severe economic downturn and the uncertainty clouding the future.

And, it warns, if property prices decline, "this will increase the incidence of negative equity".

It will, however, be difficult to accurately gauge the health of the property market because housing turnover has dropped so sharply.

"Auction volumes and clearance rates have declined sharply in Sydney and Melbourne in recent weeks," the report says.


"Consistent with this, liaison with banks suggests housing loan applications are falling and information from housing contacts in the bank's liaison program also report much lower foot traffic through display homes."

But this leaves some home loan borrowers in a precarious situation.

"For households behind on their repayments and with little equity in their homes, very low turnover and declines in housing prices will make it harder to resolve their situation by selling their properties."

The Reserve Bank says that its analysis indicates that a 10 per cent drop in housing prices would push the share of mortgages in negative equity – where the value of the home loan is greater than what the property is worth – up from 3.5 per cent to 6.5 per cent.

The increase in home loan borrowers with negative equity would rise even more sharply if prices were to drop by more than 10 per cent.

And this is bad news for the banks. As the Reserve Bank points out, "a higher incidence of negative equity increases the risks of losses ultimately incurred by lenders in the event of foreclosure".