About 7 per cent of Australian mortgage holders have little or no real equity in their homes, a report by Roy Morgan Research says.
In the 12 months to October 2016, the value of 302,000 homes were equal or lower to the mortgage owed on them, although that number has improved from 345,000 in the same time in 2015.
"This represents a considerable risk to these households and their banks, particularly if home values fall or households are hit by unemployment," Roy Morgan's Norman Morris said.
"With some early signs that home loan rates are rising, the problem is likely to worsen as repayments increase and home values may decline, which has the potential to lower equity levels even further."
Most of the weaker home values were in Western Australia, where homeowners have suffered as prices plunge from a mining decline, and South Australia.
At October 2016, 10.4 per cent of mortgage holders in WA have little or no equity in their home, the highest in Australia. This is a 2.1 percentage points deterioration to the previous year. The second worst state is South Australia at 8 per cent of mortgage.
Sydney has the lowest proportion of mortgage holders with little or no equity in their home at 3.9 per cent, down 1.1 per cent from in the same period the previous year.
This improvement is due to home prices increasing faster than in most other areas of Australia and outpacing the growth in the average amount owing on mortgages.
Sydney has been the leading housing market in the past four years, rising more than 60 per cent in capital values, a condition to be wary of, Roy Morgan said.
"Due to the strong growth in house prices in Sydney and Melbourne over recent years, mortgage holders in those areas have high levels of equity but are still dependent on a strong labour market and low interest rates to maintain their strong position," Mr Morris said.
"Although the majority of Australians with a mortgage have considerable equity in their home, there is always speculation that the rapid growth in house prices must soon come to an end and when it does, so will the growth in home equity."
Tasmania is the second-best performer with 4.7 per cent followed by NSW at 5.1 per cent and Victoria at 6 per cent.
Importantly, mortgage holders with little or no equity in their homes have much lower average house values ($457,000) compared to all mortgage holders ($688,000).
In Sydney, the average value of homes with a mortgage is $1.1 million, compared to the much lower average of $762,000 for mortgage holders with no real equity. In Melbourne the figures are $795,000 for the average value of a home with a mortgage, well above the $523,000 for those with no equity in their home.
Mr Morris said several reasons could cause declines in value those include: areas with declining values, apartments in Sydney and Melbourne losing value, borrowing more than the real value of the property, falling behind in mortgage payments, and increased borrowing for renovations that haven't been reflected in increased property values," Morris said.
The survey was drawn from more than 100,000 interviews over the last two years including more than 10,000 owner-occupied mortgage holders.
