An inner-city apartment glut in Melbourne and Brisbane threatens to squeeze property developers, the Reserve Bank has warned, amid signs some off-the-plan buyers are already facing difficulties settling on their purchases.
In its latest check-up on the banking system, the Reserve says risks in the apartment market are "coming to the fore," especially in inner-city Melbourne and Brisbane, which face the greatest increase in housing supply from a building boom.
![Construction in Docklands, a hotspot for apartment construction in Melbourne.](/web/20161014162104im_/http://www.theage.com.au/content/dam/images/g/r/z/h/j/5/image.related.articleLeadwide.620x349.gs2c37.png/1476423141526.jpg)
The Australian Prudential Regulation Authority also told the government's banking inquiry it was looking closely at the potential for banks to be exposed to property developers.
Separately, the regulator backed the major banks in talking down the commercial prospects of banks offering "tracker" mortgages that matched RBA cash rate changes.
Over the next two years, the RBA said builders would complete 16,000 new units in Melbourne, 12,000 in Brisbane, and 10,000 in Sydney.
With so many new properties coming onto the market, the RBA said there was a risk that off-the-plan buyers may not be able to settle because the banks could value the properties at less than the contract price - something that is already occurring in some cases.
Banks may also deny some off-the-plan buyers enough finance to settle, especially foreign investors, after lenders have clamped down on lending to purchasers from overseas.
The RBA said these risks, which would mainly hit banks through their lending to developers, were "closer to materialising."
It singled out inner-city parts of Melbourne and Brisbane, where the number of new units to hit the market will be greatest, relative to the existing housing stock. Sydney's new units were more widely dispersed and made up a smaller share of the housing stock, it said.
"Risks around the projected large increases in supply in some inner-city apartment markets are coming to the fore, especially in Brisbane and Melbourne," the RBA said in its Financial Stability Review.
"There are signs that some settlements are taking longer and lending valuations are coming in below their contract price, though settlement failures to date remain low."
It said the banks had less than $15 billion in combined loans to property developers for apartment developers in Sydney, Melbourne and Brisbane.
The RBA also reiterated that bank shareholders may have to accept lower returns, which could affect dividends, as global regulators force lenders to hold larger capital buffers to protect the financial system from future shocks.
It would be "disappointing," the RBA said, if lenders sought to boost returns by taking on greater risk in their businesses.
Despite its concerns, the RBA appeared more comfortable with the banks' lending to households, which is considered much lower risk, and where credit standards have been tightened in recent years.
It said house price growth had risen in Melbourne and Sydney in recent months, but conditions were softer than a year ago.
Banks have already put the brakes on lending to high-rise developers, and APRA's chairman, Mr Byres, told the government's banking inquiry it would soon have more to say on banks' exposure to the apartment market.
"In a couple of markets, it does look like there's considerable supply coming onstream, and there may be difficulties in the market actually being able to accommodate that supply," Mr Byres said.
Mr Byres also faced questioning on the suggestion for banks to offer a "tracker" mortgage, loans with interest rates that would be set a fixed amount above the cash rate. Mr Byres backed the banking industry's view that such a product would be higher-risk, and may therefore cost customers more.
"There's about 110 ADIs [authorised deposit-taking institutions] that do housing lending... if there was a big demand for this product I'm sure someone would have had a go at it," Mr Byres said.
The other key domestic risk identified by the RBA, aside from the apartment market, was a rise in soured loans in mining areas. More properties were being repossessed in Western Australia, it said, as banks also experienced higher loan losses from mortgages in WA and Queensland.
The RBA pointed to house prices falling sharply in resources regions such as the Pilbara and Kimberly, saying this made it difficult for banks to sell properties, but noted the banks did not have a large exposure to these areas.