Apartment oversupply might be worse than predicted

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The apartment oversupply problem may be worse than what the Reserve Bank has stated, with the latter’s data only focusing on inner city apartments.

The RBA has previously warned that the massive number of inner city apartments approaching completion could send some of their developers broke and leave banks nursing big losses. The bank isolated the inner city market, with only a total of 38,000 apartments due for completion in the next three years.

However, according to CoreLogic data released last May, the estimated number of apartments due for completion in the whole Brisbane-Melbourne-Sydney market was over 200,000 in the next two years. This is five times higher than the RBA’s inner city estimate.

“While it’s true that the inner city is a tougher area, particularly in Melbourne and Brisbane, you must look at the total city apartment exposure to understand the magnitude of the problem,” wrote Robert Gottliebsen in his business column in The Australian.

The Reserve Bank further estimated a total bank exposure of between $30 billion and $50 billion to the three-city inner city mortgage market, which is around 2% to 5% of the banks’ total exposure. But since these only apply to the inner city market, it is clear that mortgage exposure is substantially greater than the said figures. The inner cities are just about one-fifth of the total market.

“We are looking at a possible exposure of between $55 billion and $60 billion, or the vast bulk of the banks’ residential development lending,” wrote Gottliebsen.

“If one major developer goes to the wall, then we will see a disaster and bank losses will be large.”

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