The Reserve Bank has warned that a sharp fall in the value of inner-city apartments in Melbourne and Brisbane is “closer to materialising”, as developers continue to flood both markets with new high-rise dwellings.
The central bank made the observation in its latest financial stability review, which noted that supply pressures are likely to weigh most on apartment prices in Brisbane and Melbourne.
Over the next two years, around 16,000 new apartments will be completed in Melbourne, raising the prospect of a glut in high-rise units.
About 12,000 new apartments are expected to be built in Brisbane.
The RBA is concerned that a fall in demand for new apartments could test the ability of developers and property buyers to meet repayments on loans that collectively run into the tens of billions.
“In residential property development, the risks in some apartment markets are closer to materialising, as the large and geographically concentrated increase in supply approaches,” the central bank said.
“If apartment market conditions were to deteriorate in these inner-city areas, it is more likely that banks would experience material losses on their development lending rather than on their mortgages.
“Banks would experience losses on these exposures in default events where the value of the properties is insufficient to cover the debt outstanding.”
Home borrowers in WA and Queensland under ‘stress’
In its wide-ranging survey of the domestic housing market, the RBA also observed that the number of home borrowers unable to meet mortgage repayments was rising “substantially” throughout the mining regions of Queensland and Western Australia.
House prices in some have more than halved in the last three years, leaving many borrowers without means to repay loans.
This has triggered a significant rise in the number of homes being repossessed by banks, particularly in WA’s Pilbara mining region where the median house price has slumped to less than $400,000 from $830,000 in 2013.
Borrowers are also under pressure in Queensland’s Central Highlands where house values have been crunched by more than 55 per cent.
“Although the household sector’s aggregate financial position has remained broadly steady, households in some parts of the country are experiencing increased financial stress,” the RBA observed.
“Housing loan performance in Western Australia and Queensland in particular deteriorated further over the first half of 2016.
“The (commercial) banks attributed this deterioration largely to declining incomes in the mining states rather than to unemployment.”
The big problem for many borrowers in mining towns is that it has become extremely difficult to repay lenders because there are simply no buyers for their properties, even when they are offered at big discounts.
The national picture: risks have ‘lessened a little’
While thousands of borrowers living in mining areas are doing it tough, the RBA believes that the overall risk profile of Australian home borrowers actually improved in the first half of the year.
The Reserve attributed the modest improvement to the slowdown in house price growth and the effect of tighter lending measures imposed by the Australian Prudential Regulation Authority on the banks.
Although the average mortgage debt of Australian home borrowers rose to a record $256,000 at the end of June, the RBA observed that a larger proportion of recent home buyers had stumped up bigger deposits compared to people who applied for loans last year.
The RBA also observed that fewer borrowers took out interest-only loans in the June quarter.
One of Australia’s leading banking industry researchers – Martin North of Digital Finance Analytics – is less sanguine about the risk profile of home loans and general lending by the banks.
He pointed to the latest loan data published by the Australian Bureau of Statistics, which showed that investment property lending was the only credit category to grow in August.
“The lack of business investment growth is hobbling overall economic outcomes, whilst our housing stock value, and bank balance sheets are artificially being inflated,” he said.
“This mix of lending and the implications, is what the RBA should be discussing.
“Ultra-low interest rates are not helping to restore productive growth.”