Westpac is dismissing concerns of a looming apartment glut in Sydney and Melbourne, arguing neither city faces an over-supply of housing next year when thousands of units come onto the market.
While regulators, credit rating agencies and some economists have warned of rising risks from an apartment-building boom, the head of Westpac's flagship consumer bank George Frazis predicts Sydney will continue to have a shortage of homes over the next two years.
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Apartment record toppled
Australia has a new price record for an apartment. And with views like this, it's little wonder.
In Melbourne, Mr Frazis says he expects price growth to slow next year, but the wave of new units will "balance out" a previous housing shortage, rather than tip the market into over supply.
Although the bank is more cautious on inner-city units, his comments suggest the country's second largest lender does not expect the apartment building boom to have a widespread negative impact on the housing markets of Australia's biggest cities.
Over the next two years, about 16,000 apartments are expected to be completed in Melbourne, and 10,000 in Sydney.
In an interview, Mr Frazis played down the impact of this apartment-building boom on prices, and said the bank had "absolutely no concerns" about its exposure to inner-city units.
"If you look at NSW and Sydney, we still have a structural shortage of housing in Sydney because of the population growth and the pent-up demand," he told BusinessDay. "Even if we look at what's coming online over the next year or two, we'll still have structural under supply."
Melbourne's apartment market was "starting to balance out", he conceded, which would dampen price growth.
"I would be surprised if the rate of increase doesn't moderate, but I can't see a collapse of pricing that would impact our customers."
He said, however, that, over the medium term, Victoria's population growth would soon require more housing to be built.
Westpac's view was a more upbeat assessment than the Reserve Bank of Australia, which last month warned of risks in the apartment market "coming to the fore". The Australian Prudential Regulation Authority's chair Wayne Byres also last month said there could be "difficulties" in the market's ability to absorb the large increase in new apartments.
AMP Capital's chief economist Shane Oliver had predicted apartment prices could fall by 15 to 20 per cent by 2018 in the most over-supplied areas.
In a sign Westpac was wary about inner-city areas, Mr Frazis said it had lowered its exposure to inner-city apartments, and some valuations of units being settled in Melbourne were lower than the purchase price. Even so, the proportion of inner-city apartment loans more than 90 days behind their repayments was lower than its average across the bank's mortgage book.
"From our perspective, we have absolutely no concerns in our book about the inner-city apartments," Mr Frazis said.
The consumer banking arm led by Mr Frazis is Westpac's biggest division. It has grown at a faster pace than the market last year, adding $28 billion in new mortgage lending, and customer numbers have risen 3 per cent.
As banks increasingly compete through their technology, it is believed Westpac will start to offer Google's Android Pay to customers before the end of this year.
Profits from retail banking had slowed due to higher funding costs, and Mr Frazis said that, although deposit costs had "moderated", its overall cost of funds was elevated. There had been predictions the recent surge in bond yields could force banks to raise fixed interest rates, and Mr Frazis acknowledged the change in bond markets.
"Obviously, if the yield curve is going up, then that will have an implication for fixed rates, potentially," he said.
While analysts were wary of the apartment glut, prices would have to fall a long way to damage the country's banks. An RBA study last month said bank losses from falls in apartment prices would be "very low" unless prices fell by more than 25 per cent.