Melbourne property market ‘most at risk’
Shutterstock
The Reserve Bank is ringing the alarm bells on Melbourne’s boom in high-rise apartments, warning that the inner-city rental market was approaching a point of oversupply.
The central bank’s concerns were highlighted in its March financial stability report, which also noted that strengthening house prices were still being driven by investment borrowers.
In a review of developments in the national housing construction sector, the RBA stated that the prospect of housing oversupply at a national level was not great, but singled out the Melbourne market as at most risk.
• Housing market a risk to economy
• Are baby boomers overheating the property market?
“The risk of oversupply appears most evident in inner-city Melbourne, where the level of high-rise apartment construction has been elevated for a number of years,” the RBA stated.
“The rental market already looks fairly soft, with relatively high vacancy rates and little growth in rents.”
While the RBA’s warning is potentially bad news for property investors, it’s a positive for renters who might have to pay less if property prices begin to slide.
The bank observed that many new apartment projects planned for Melbourne were predicated on expectations that demand from foreign students would continue to increase in coming years.
However, the RBA is warning that a price correction could occur in the Melbourne apartment market if foreign student numbers do not rise.
“These apartments may be difficult to sell in the secondary market if investors’ expectations of future student demand are not met, which could place downward pressure on prices, including the broader Melbourne apartment market.”
A recent spike in Brisbane apartment approvals has also raised concerns that supply may soon outstrip demand in the Queensland capital.
The RBA is still worried that most investors are using interest-only loans to fund property purchases.
It noted that interest-only loans increased risks in the financial system because “they enable borrowers to pay down principal more slowly than a conventional principal and interest loan would require”.
Supply pressures are also beginning to weigh on commercial property in the capital cities.
“…leasing conditions have remained soft in many local markets, and oversupply is emerging in the Perth and Brisbane office markets,” the RBA stated.
“These dynamics increase the vulnerability of the commercial property market a price correction.”
Other concerns, and solutions
More generally throughout Australia, the RBA singled out negative gearing and interest-only loans as a potential cause of a house price correction.
It also flagged potential risks in the office property market, warning that an oversupply is emerging in the Perth and Brisbane office markets.
Given that interest rates are already at record lows, and likely to see another cut later this year, the RBA put the onus on the prudential regulator APRA and the corporate watchdog ASIC to ensure the property market doesn’t overheat.
In particular, it focused on APRA’s policy of monitoring ‘authorised deposit-taking institutions’ (i.e. banks) to make sure they are not lending too much to investors over owner-occupiers.
“APRA supervisors will be alert to growth in an individual ADI’s investor housing loan portfolio that is materially above a benchmark of 10 per cent per year,” it said.
The RBA also held out hope for ASIC’s review of interest-only lending, which was announced in December 2014.
“The heightened scrutiny by ASIC should help to prevent borrowers from obtaining loans that they are unlikely to be able to repay without experiencing undue hardship,” the RBA said.
