For most people who buy a home, a mortgage represents the single largest debt they will take on in their lives. But what happens if the market value of a property you’ve bought falls below the amount you still owe on your home loan?

This situation is called “negative equity”. In Australia, decades of house price growth have meant it simply hasn’t been a pressing national issue. Now, as house prices fall across large parts of the country, could it soon become one?

Speaking after the Reserve Bank’s decision to leave interest rates on hold last Tuesday, RBA Governor Michele Bullock said less than 1% of Australian households were in negative equity.

Bullock also said that, according to RBA modelling, even if house prices fell by 20%, only about 5% of households would end up in this situation.

That could still amount to tens of thousands of people, including many recent home buyers with large outstanding loan balances.

However, being in negative equity may not be as much of a problem as some recent headlines might have you believe. Here’s why.

Prices are sliding from lofty heights

This year’s three interest rate hikes and tax changes in the May federal budget are continuing to cool the property market.

Property data firm Cotality’s home value index for July shows quarterly falls of 3.4% in Melbourne and 4% in Sydney, with national prices down about 2%. Across combined regional areas,........

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