Sydney Apartments Pose Financial Stability Risks, RBA Says

Bloomberg

Published Mar 20, 2019 11:38

Updated Mar 20, 2019 16:00

Sydney Apartments Pose Financial Stability Risks, RBA Says

(Bloomberg) -- The apartment market in Australia’s largest city is “quite soft” due to a sharp rise in supply that’s increased risks to financial stability, a senior central bank official said.

Sydney added more than 80,000 apartments in the past few years, increasing the city’s housing stock by about 5 percent, Reserve Bank of Australia Assistant Governor Michele Bullock, who oversees the financial system, said in the text of a speech. In Melbourne and Brisbane, which also saw substantial construction, apartment prices have so far held up, she said.

“Our main concern with this from a financial stability perspective is the potential for this large influx of supply to exacerbate declines in housing prices and so adversely impact households’ and developers’ financial positions,” Bullock said in Perth Wednesday. “Currently, the risks here appear to be elevated but contained.”

The RBA has dropped a tightening bias in favor of a neutral policy stance as signs mount that tumbling property prices -- down 13.2 percent in Sydney -- are prompting consumers to rein in spending and slowing economic growth. The central bank has kept interest rates unchanged for 2-1/2 years at a record-low 1.5 percent and markets now expect a quarter-point cut by year’s end.

Bullock’s boss, Governor Philip Lowe, has noted that a key problem in the east coast housing market had been the slow response to demand pressures. That resulted in Sydney property prices surging 75 percent in the five years to mid-2017. By the time the swathe of new apartments came online, the demand had fallen away and prices slid.

The property market has also been hit by tightening credit as banks scaled back lending to investors and more heavily scrutinized borrowers in the wake of an inquiry that revealed widespread misconduct in the finance industry.

Bullock highlighted two key risks to financial stability:

  • Household balance sheets, as declining apartment prices negatively impact households that purchased off the plan and are yet to settle
  • For developers delivering completed apartments into a cooling market. If people who had pre-purchased are having difficulty getting finance, or decide it’s not worth going ahead with the purchase, there would be increasing settlement failures

“The apartment market is quite soft in Sydney,” Bullock said. “Apartment prices have declined since their peak, rental vacancies have risen and rents are falling.”