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Reserve Bank alert on apartment oversupply
Peter Ryan reported this story on Friday, April 15, 2016 12:22:00
http://www.abc.net.au/worldtoday/content/2016/s4443980.htm
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KIM LANDERS: An oversupply of residential property developments is now a key risk to Australia's financial system according to the Reserve Bank (RBA).
While real estate development has softened in recent months, the RBA is worried about a concentrated growth in supply of apartments in Sydney, Melbourne, Brisbane and Perth.
The RBA's warning is of particular alarm to investors who have bought "off the plan". Business editor Peter Ryan is just back from the RBA's headquarters in Sydney's Martin Place and he joins me now.
Peter. Is this something that the Reserve Bank is worried about right now or is it warning that it's going to be a problem down the track?
PETER RYAN: Well, Kim, in its financial stability review, the Reserve Bank is very much on alert about the next few years, not necessarily now and as listeners will know, there's been a very big investment in what's known as "off the plan" apartments, where developers sell at today's value and the investor settles once the apartment is complete.
It might sound like a good deal in today's rising market, but the Reserve Bank is worried about quote "significant and geographically concentrated" growth in the supply of new apartments in Sydney, Melbourne, Brisbane and Perth.
So basically, when supply outstrips demand, values could fall and investors might find their investments going sour or south or underwater, and the Reserve Bank says risks are rising that quote "settlement failures might increase".
And that a downturn in apartment markets could weaken the financial health of developers and also the people who've bought into apartments.
KIM LANDERS: So how exposed would investors be in that situation?
PETER RYAN: Well, the Reserve Bank suggests an oversupply of apartments may weigh on prices and rents over the next few years.
It says quote "If that occurs, investors will need to service their mortgages while earning lower rental incomes," and it goes on to say the option of selling up the investment to service repayments to the bank might be difficult might be difficult in an oversupplied market where prices are falling.
Now all of this is in the context of a housing bubble, or talk of a housing bubble, especially in Sydney and Melbourne, and while lending standards have been tightened up recently and banks are getting tougher about who they lend their money to, the focus is moving from residential property or owner/occupied to what is now or what appears to be now an oversupplied apartment market.
KIM LANDERS: What concerns does the Reserve Bank have about Australia's potential exposure to foreign investors?
PETER RYAN: Well, the review also points to concerns about a build-up in property investment by Chinese investors and how Australia might be exposed to a downturn if, for example, off the plan purchases turn sour.
The Reserve Bank says apartments are very popular with investors and foreign buyers and any concern over the settlement risk we were talking about earlier or a slowdown in demand for Australian-located properties by Chinese and other Asian residents, that could lead to difficulties.
So the suggestion reading between the lines is that in the event of falling prices or a global shock, Chinese investors might come under pressure, they could decide to quit Australian real estate or sell up and a lot of properties could be thrown onto the market.
Now the Reserve Bank doesn't say any of this is imminent but apartments have moved to become the key risk.
KIM LANDERS: Well, let's switch from real estate to mining, and is the Reserve Bank concerned about the downturn in mining companies, particularly because of falling commodity prices?
PETER RYAN: Well, while the Reserve Bank says the exposure that Australian banks have to mining is "small", even though the ANZ Bank for example has updated its provisions in case there are mining difficulties or collapses.
It's warning that foreign banks that operate in Australia have a higher share of total lending to miners.
The Reserve Bank also looks at the household sector. It's saying that while household debt is increasing, many households now have a bit of a buffer through mortgage offset facilities or equity in their own homes, has been built up through low interest rates that would help in any shock.
But noting low interest rates around the world, the Reserve Bank says Australia remains exposed to developments beyond the local horizon, out of our control and that a large global shock could be quite difficult for overseas policy makers to address and that there could be spill-over effects into the Australian economy.
KIM LANDERS: Now finally, a lot of key economic data has been released in China today. Quickly take us through that.
PETER RYAN: Yes, economic growth, or GDP, in China has come in at 6.7 per cent year on year - that's in line with forecasts. It's down from 6.8 per cent in the previous quarter, but this is all part of a strategy for a managed slowdown in China from double digit growth we saw a few years back.
There's also been an improvement in industrial output. This positive news put a rocket under the Australian dollar, which spiked to 77.38 US cents.
KIM LANDERS: Business editor, Peter Ryan.