Reserve Bank warns of flood of new apartments

We are going to read a lot about apartment oversupply this year.

The Reserve Bank of Australia has already kicked off the discussion warning of the consequences of a flood of new apartments hitting the market.

The central bank pointed out that residential approvals have been almost 50 per cent higher across Australia than their long-term average during the past two years.

The RBA pointed out there are risks involved with the high level of activity in apartment construction.

It went on to pinpoint a geographic concentration "particularly in inner-city Melbourne and Brisbane". Significantly Sydney wasn't mentioned.

But this is not to say we are free of concerns.

Indeed oversupply of units in some Sydney inner city suburbs represents the greatest risk for invesors, according to the latest update from the valuation firm, Herron Todd White.

It has already detected a number of valuations for new units upon settlement not meeting their off the plan prices. 

It is particularly happening with suburbs with concentrated new stock along with a distinct difference in value between the new and original older style unit prices. 

HTW says this is more commonly in some second tier suburbs in western Sydney and additionally in some pockets of the northern suburbs. 

While mostly occurring for overseas buyers, it could trigger difficulties for locals obtaining finance.

There is also the concern that rentals might fall short of yielding enough to service mortgage repayments.

The valuers nominated areas with the lowest predicted growth for the inner city fringes where they envisage there may be an oversupply of new units.

They suggested developments that have been completed simply to cash in on demand could fall short in quality and "therefore won't have appeal to either owner occupiers and potential tenants." 

Middle ring suburbs HTW believe are at risk of oversupply or heavily investor led include Wentworth Point, Carlingford, Epping, Olympic Park, Macquarie Park and Parramatta.

"The supply of new units in these areas is well above long-term averages."

The RBA discussion pointed out that detecting oversupply was not simple noting an approved apartment takes around three times to complete as a detached house.

It noted the average completion time for an apartment was around six quarters.

It added that the lag between the decision to approve a higher-density dwelling and its completion "means that the impact on the supply of housing, including prices and vacancy rates, may be less predictable than in the past".

It advised the Australian residential pipeline was equivalent to 12 per cent of GDP, and dwellings yet to be completed accounted for 2.5 per cent of the country's total supply of housing.

The RBA warned developers might not be able to respond in time to signs of over-supply and waning house prices, "so a general oversupply is more likely to build up".