Apartment oversupply could push down prices, hurting Melbourne and Brisbane developers: RBA
The Reserve Bank of Australia has concerns on the apartment market, warning a flood of new apartments could come onto the market in certain areas, pushing down prices and causing heavy losses for developers.
The concerns were voiced in its latest Statement on Monetary Policy. The central bank pointed out that residential building approvals have been almost 50 per cent higher than their long-term average over the past two years, helped by low interest rates and buoyant housing prices in the eastern states.
While residential building approvals, especially for higher-density apartments, have fallen in recent months, the RBA statement noted dwelling investment should hold up as developers start work on projects that are already in the pipeline.
It said private dwelling investment continued to grow at an above-average rate over the year, but fell unexpectedly in the September quarter, largely because poor weather disrupted construction.
Residential building approvals, especially higher-density dwelling approvals, have fallen in recent months (Graph 3.6). Nevertheless, the large amount of work in the pipeline should continue to support a high level of dwelling investment for the foreseeable future.
The central bank pointed out that that "an approved apartment takes around three times as long to complete as a detached house".
It added that the longer lag between the decision to approve a higher-density dwelling and its completion makes it easier to forecast dwelling investment levels further into the future.
But it also "means that the impact on the supply of housing, including prices and vacancy rates, may be less predictable than in the past".
By late last year, the residential dwelling pipeline was equivalent to 12 per cent of GDP, and the number of dwellings yet to be completed accounted for 2.5 per cent of the country's total supply of housing.
"This large pipeline of work primarily reflects strong growth in building for higher-density dwellings (such as apartments)," the RBA says.
It noted the average completion time for an apartment in 2016 was around six quarters, almost three times longer than for detached houses, and twice as long as for townhouses.
It acknowledged the large pipeline of dwelling investment will continue to support economic activity and employment over the next couple of years.
But the RBA pointed out there are risks involved with the high level of activity and the shift to higher-density buildings especially as the apartment construction "is geographically concentrated, particularly in inner-city Melbourne and Brisbane".
Their statement also said a risk existed that 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".
The RBA warns that "if these risks materialise, there could be an increase in the proportion of newly completed apartments that fail to settle and a rise in the share of work yet to be commenced that is not undertaken".
The central bank said conditions in the established housing market differ significantly across the country (Graph 3.7; Graph 3.8).
Conditions in the housing market in Sydney and Melbourne strengthened over the second half of 2016, but they have remained relatively subdued elsewhere. In the private treaty market, the average discount on vendor asking prices has decreased, but the average number of days that a property is on the market has increased from the lows of 2015, mainly reflecting developments outside Sydney and Melbourne.
In general, price growth for detached houses has been stronger than for apartments, particularly in the capital cities where the supply of new apartments has increased the most.
For example, in the second half of 2016, apartment prices declined noticeably in Brisbane while growth in prices for detached houses increased. Conditions in Perth remain particularly weak; prices and rents have continued to decline and the vacancy rate has increased further (Graph 3.9).
Rental growth in the rest of the country remains subdued and vacancy rates have been steady near their long-run average for some time.
Low interest rates support demand
The RBA said low interest rates are support housing demand.
"Over recent months, loan approvals have picked up, largely reflecting stronger demand from investors. Bank lending standards have been tightened over the past couple of years, which is a positive development given the already high levels of debt," it added.
Housing credit growth increased a little in recent months to an annualised rate of around 6½ per cent, but remains below the pace seen in 2015. The pick-up in housing credit growth reflected faster growth in credit extended to investors more than offsetting slower growth in owner-occupier credit, and has been consistent with trends in housing loan approvals (Graph 4.13).
The recent strength in housing loan approvals was concentrated in New South Wales and Victoria, while conditions remain weak in Western Australia (Graph 4.14), it said. The recent increase in overall housing loan approvals is consistent with a pick-up in housing price growth and turnover.
Average loan-to-valuation ratios are continuing to decline, reflecting the effects of tighter lending standards that were in part prompted by the measures introduced earlier by APRA.
According to the central bank, "a significant portion of the increase in investor credit growth is also likely to reflect the extension of credit to investors settling the payment of newly completed apartments that were purchased off the plan at an earlier time."
The pick-up in investor credit growth also follows reductions in interest rates through the middle of 2016. Since November, most lenders have increased fixed and some variable housing interest rates, especially for investors or borrowers with interest-only loans.
Three of the four major banks have increased their standard variable rates for investor loans by 7–15 basis points but have left owner-occupier rates unchanged. Two major banks also announced increases in interest rates for interest-only loans. Other lenders have increased variable lending rates to both owner-occupiers and investors by 10–15 basis points. Some lenders have indicated that they have implemented these changes in response to higher funding costs and to meet regulatory requirements, such as APRA’s guidance for a maximum growth rate on investor credit of 10 per cent. Overall, these interest rate increases are estimated to have boosted the average outstanding housing interest rate by less than 5 basis points (see Table 4.2).
In addition to increasing the differential between advertised interest rates for new owner-occupier and investor loans, many lenders appear to have reduced the discretionary discounts available to new borrowers, it said.