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 per cent, 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.
“Currently, the risks here appear to be elevated but contained.”
The RBA has dropped a tightening bias in favour of a neutral policy stance as signs mount that tumbling property prices — down 13.2 per cent in Sydney from their peak — 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 per cent and traders are now pricing in 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.
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That resulted in Sydney property prices surging 75 per cent 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.
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The property market has also been hit by tightening credit as banks scaled back lending to investors and more heavily scrutinised borrowers in the wake of an inquiry that revealed widespread misconduct in the finance industry.
Bullock said there are 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 is 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.”