Investors in new Melbourne high-rise apartments are at twice the risk of falling into a position of negative equity - owing more on their mortgage than the value of their property - compared with than those in Sydney, according to credit rating agency Moody's.
Moody's figures (based on analysis of $28.7 billion of residential mortgage backed securities) show that on average buyers of inner city high-rise apartments in Melbourne have created just 7.6 per cent in "additional equity" since taking out a mortgage compared with 19.7 per cent of equity created in inner Sydney apartments and 10 per cent in Brisbane.
The difference in equity positions is mainly due the much weaker growth in apartment prices in Melbourne compared with Sydney - 5 per cent versus 40 per cent over the last five years - as the Victorian capital grapples with a glut of new apartments coming onto the market, more than 14,000 over the next two years.
Assuming a Melbourne investor borrowed 95 per cent of the purchase price, leaving them with 5 per cent equity, a correction of around 13 per cent could put them in a position of negative equity compared with a much greater 25 per cent fall in apartment prices required in Sydney.
Adding to the risk factor, Melbourne City apartment owners (CBD, Docklands and Southbank) account for almost two-thirds of the riskier investment and interest-only loans, the highest of any of the high-density regions.
"Mortgages in areas in inner Melbourne have the least additional equity to absorb losses, owing to relatively low rises in apartment prices," said Moody's analyst Natsumi Matsuda.
"In the Melbourne City region, where the largest number of new apartments is expected to be completed over the next two years, the weighted average additional equity is 7.6 per cent. In two other regions in inner Melbourne, Yarra and Port Phillip, it is 7 per cent and 7.4 per cent respectively," Ms Matsuda said.
While the latest CoreLogic figures show Melbourne apartment prices are up 5.2 per cent over the past 12 months, most of this growth would come from older apartments or those in small suburban developments.
Insurer QBE's annual report, produced by consultancy BIS Shrapnel, forecast Melbourne apartment prices to fall nine per cent between 2016 and 2019, 6.8 per cent in Sydney and 8.2 per cent in Brisbane.
"Record levels of unit completions and a strong project pipeline are expected to affect Melbourne's median unit price," said QBE Lenders' Mortgage Insurance CEO Phil White
Figures released earlier this year from valuation firm WBP Property Group show central Melbourne off-the-plan apartments fell about 11 per cent in the first year between their original purchase and pre-settlement valuation.
In addition, research by The Australian Financial Review uncovered numerous Melbourne apartments selling up to 24 per cent below their previous off-the-plan purchase price.
The precarious position faced by many Melbourne investors comes as the Reserve Bank warned of the risk of apartment oversupply in its October Financial Stability Review and as banks rein in their lending to borrowers buying high rise apartments. Non-bank and overseas lenders have stepped in to fill the breach, but at much higher rates of interest.
While default rates remain low at about 5 per cent, greater numbers of overseas buyers are struggling to get finance to settle their apartment purchases, recent settlement figures from law firm Maddocks show.
