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The Reserve Bank warns global financial stability threats are mounting, with an AI investment bust a possible trigger, while estimating fewer than 1% of borrowers are in negative equity and about 5% could be at higher default risk in an overseas shock.
The Reserve Bank has warned that Australia is unlikely to be immune from a sudden collapse of the global artificial intelligence investment boom, as threats to international financial stability continue to mount.
In its latest financial stability review, released on Thursday, the central bank said a loss of faith in AI could trigger disorderly asset price corrections. The warning came alongside an estimate that fewer than one in 100 borrowers owe more on their home than it is worth, even after this year's broadening property price falls. The RBA said a possible trigger for international economic turmoil could be a shift in sentiment towards the AI investment boom.
AI Debt Cycle Fuels Stability Fears
That boom is increasingly debt-funded and fuelled by expectations of sustained rapid earnings growth. The report warned that the debt-financing cycle underpinning investment in AI is becoming more opaque and circular. It also pointed to high valuations in global corporate debt and share markets, which it said were vulnerable to a disorderly correction. The central bank said the threats to global financial stability were not limited to AI.
It cited two ongoing conflicts, in the Middle East and Ukraine, alongside intensifying strategic competition among major powers. The RBA also warned of the rising risk of cyber-attacks, potentially facilitated by AI, and a sudden sell-off in global bond markets. Domestically, the RBA estimated that fewer than 1% of borrowers were in negative equity, meaning they owe more on their loan than the value of their property.
It said recent buyers who took out loans worth close to the value of the property were more likely to be in that position. This included first home buyers who used the Australian government's 5% deposit scheme, also known as the 5% home guarantee scheme. Just over 100,000 first homebuyers have used the scheme since last October, when Labor opened it up to those on higher incomes.
The RBA said evidence suggested the share of these borrowers falling behind on payments remained contained. The RBA estimated that even a 20% property price crash would only push about 5% of mortgages into negative equity. It said this was a testament to the significant value gains most homeowners have enjoyed over the years.
RBA Scenario Shows Rising Default Risk
The report added that negative equity is insufficient to trigger default if borrowers remain able to service their loans, which remains the case for the vast majority of these households. It said that while some households continue to experience hardship, the estimated share of mortgagors in severe financial stress or in arrears has so far remained low, supported by the strong labour market and mortgagors' savings and equity buffers.
An RBA scenario analysis showed the share of home borrowers at higher risk of defaulting would rise to around 5% in the event of an overseas economic shock. That scenario assumes the unemployment rate increases to 6.3%, inflation increases to 7%, and the cash rate rises to 5.6%. The estimated share of borrowers at higher risk of default would be only a little higher than the last peak in 2023.
In this scenario, around two-thirds of these borrowers are estimated to have insufficient income to cover their expenses but have enough buffers to service their debts and essential expenses for at least six months. In a scenario where housing prices were to decline by a further 20%, few households are in negative equity. The review also highlighted pressure on household budgets. It said all households' budgets have been affected by high inflation eroding purchasing power.
Inflation Erosion Hits Household Budgets
Australia's income per person, after tax and interest payments and adjusted for inflation, declined over the first half of 2026 due to higher inflation and increases in interest rates. The report said this is more likely to cause stress for lower-income households, many of whom are renters, because their expenses tend to make up a larger share of their disposable income.
House prices in Australia have been falling after multiple interest rate hikes this year, along with changes to the taxation of housing investment and lingering economic uncertainty caused by conflict in the Middle East. On Tuesday, the Reserve Bank lifted official interest rates by 0.25 of a percentage point to a 15-year high of 4.6% in a bid to dampen inflationary pressures in the economy. That followed hikes in February, March and May. The RBA has warned of more hikes if needed.
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brisbanetimes:Almost one out of 100 homebuyers in negative equity: RBA 
GuardianAus:Australia at risk from major global financial shock, Reserve Bank warnsThis story was compiled and edited by the HeadTopics newsroom and HT AI from the reports above.
Financial Stability Review Negative Equity Home Borrowers Interest Rates AI Investment Boom
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