Apartment market continues to be cause for concern

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Australia’s booming apartment market is still a source of financial risk, in part due to steps taken by banks and regulators to curtail investment lending in the sector.

According to the latest Financial Stability Review from the Reserve Bank of Australia, the stringent lending criteria implemented in recent times have reduced the risk that was becoming evident in the housing lending sector.

“The actions of the regulators since late 2014 have helped induce a tightening of authorised deposit-taking institutions’ (ADIs) housing lending standards, and housing market conditions have moderated since the previous Review,” the RBA said.

“In particular, the share of high loan-to-valuation lending has taken a noticeable step down and tighter serviceability metrics have reduced maximum loan sizes. ADIs have also increased advertised interest rates for investor loans relative to owner-occupier loans, while providing larger discounts for some owner-occupier lending. These developments have contributed moderation in the pace of investor credit growth.”

While the changes may have been necessary to slow the pace of investor lending, the RBA said they may have unintended consequences on projects that were planned before the changes were implemented.

“While these developments have generally enhanced resilience in the household sector, the tighter access to credit for households could pose near-term challenges in some medium- and high-density construction markets given the large volume of building activity that was started several years ago,” The RBA said.

“These apartments are popular with investors and foreign buyers and any concerns over settlement risk and/or a slowdown in demand for Australian-located property by Chinese and other Asian residents could lead to difficulties for particular projects.”

In particular, the RBA said Melbourne, Brisbane and Perth are the markets most at risk.

The RBA also noted that there are also similar conditions in Australia’s commercial real estate market as lending criteria is tightened in that sector as well.

While the RBA may be keeping a close eye on the apartment and commercial sectors, the central bank said the risks evident in the two markets would likely be manageable unless wider economic conditions deteriorate.

“None of these domestic risks appears to be enough on their own to seriously degrade the near-term functioning of the domestic financial system, though they could exacerbate a major shock from elsewhere, such as a global economic downturn.”
 

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