The Reserve Bank of Australia (RBA) today released its Financial Stability Review (FSR), which contains another warning on the budding apartment oversupply:
The near-term risks for residential property developers have increased, with a mismatch between a growing supply of geographically concentrated apartments on the east coast and concerns about softening demand for these apartments in some areas (given the rebalancing of housing demand and strengthened lending standards). As the supply of new apartments has continued to come on line, price growth has slowed over the past six months and rental growth has been modest (Graph 2.8 and Graph 2.9). Industry liaison suggests that developers in Brisbane are having increasing difficulty securing pre-sales, leading to wider use of rental guarantees and other buyer incentives, project delays and, in some cases, sales of development sites. Conditions in Perth have also deteriorated, as the new supply of apartments is being sold into a weaker local economy.
Industry contacts report that the large volume of new apartments still planned and under construction in the major capital cities has also put pressure on developers’ finances by driving up developer site and construction costs. And while the prices of off-the-plan apartments have been supported by ongoing strong interest from foreign buyers, particularly in Sydney and Melbourne, it is unclear how these buyers would respond to a downturn in their own economy or the Australian property market…
Whatever the cause, a downturn in apartment markets could weigh on developers’ financial health through a number of channels. Values of sites and incomplete developments would be likely to fall the most, and the value of apartments held on developers’ books would also decline.
Falling apartment prices also increase the risk that off-the-plan purchases fail to settle, although liaison suggests that settlement failures have, to date, remained uncommon and are generally expected to increase significantly only if housing prices fall substantially. At present, listed developers’ balance sheets generally appear healthy; many of these companies deleveraged significantly following the financial crisis. However, liquidity ratios have declined in some cases and the limited available data on unlisted developers suggest that near-term risks may be higher for them, because they tend to rely more on (bank) debt financing…
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
