The Australian Prudential Regulation Authority chair Wayne Byers said Australia was entering a very different environment than has existed for much of the past decade.

“The faster-than-expected emergence of higher inflation and interest rates will have a significant impact on many mortgage borrowers, with pockets of stress likely, particularly if interest rates rise quickly and, as expected, housing prices fall,” he said.

“Of particular note will be residential mortgage borrowers who took advantage of very low fixed rates over the past couple of years, and may face a sizeable ‘repayment ‘shock’ (possibly compounded by negative equity) when they need to refinance in the next year or two.”

Negative equity occurs when the value of the property falls below the outstanding amount of the mortgage.

“We will also be watching closely the experience of borrowers who have borrowed at high multiples of their income – a cohort that has grown notably over the past year,” Byers said.

“And we see the expected decline in housing prices as, on balance, a positive development from a system stability perspective, reducing the need for borrowers to borrow very high multiples of their incomes.”

However, the Commonwealth Bank released revealed survey data showing that 90 per cent of homeowners were prepared for the rise in interest rates and had taken steps to mitigate the impacts.

Almost half had reduced living costs, while 42 per cent had increased their savings and 38 per cent had increased their repayments.

The National Australia Bank chief executive Ross McEwan said Australia had to address housing affordability which had become harder for those on low incomes.

While he said re-opening Australia’s borders to immigration was the most pressing economic issue, there was also a need for nationally consistent planning rules to allow more homes to be built in inner-city and middle-ring suburbs of the larger cities.

The comments coincided with data from the Australian Bureau of Statistics showing housing construction approvals in Queensland continued to surge in April with a 6 per cent rise compared with falls in NSW and Victoria. 

Unit approvals, however, are in freefall. In Queensland, they fell 30 per cent in April.

The ANZ Bank said pricing instability in the construction sector, as well as expected increases in the cash rate may be behind the slowing demand for unit developments.

“We expect further falls as rising interest rates hit finance availability for developers,” the ANZ said.

The NAB’s Ross McEwan said the Australian economy had rebounded strongly from the pandemic, but there were significant issues.

He said supply chain issues meant one in four businesses could not get enough stock.