RBA Warns Easy Global Policy Lifts Risk of Office Price FallMichael Heath
Australia’s central bank said easy monetary policy globally is spurring demand for the nation’s office buildings, even as vacancies climb and rents fall, raising risks of a future price slump.
“Prices have continued to rise at a national level, driven in particular by investors’ search for yield in the global environment of low interest rates and ample liquidity, with the lower Australian dollar also likely to be adding some impetus to foreign demand,” the central bank said Wednesday in Sydney. “The risk of a large repricing and associated market dislocation in the commercial property sector has increased.”
The competition for assets and a re-assessment of return expectations for prime real estate has resulted in lower yields across a number of major office markets, according to research from Jones Lang LaSalle Inc. In Sydney and Melbourne, yields for some of these properties have fallen below 6 percent for the first time since 2008.
“The total value of office, industrial and retail property transactions has risen sharply recently, with a notable increase in the share of transactions involving foreign purchasers, particularly in Sydney,” the Reserve Bank of Australia said in its semiannual financial stability review.
About 25 central banks from Uzbekistan and China to the euro-area and India have eased monetary policy this year either by cutting benchmark rates, charging banks more to hold deposits or making it easier for them to lend, tweaking currency bands or announcing bond-buying programs. Many of the shifts, including ones by Canada, India and Australia, were a surprise.
The Australian dollar was little changed after the report and was trading at 78.64 U.S. cents at 11:32 a.m. in Sydney.
“RBA concerns about the commercial property market reflect the growing disconnect between prices and fundamentals,” Michael Blythe, chief economist in Sydney at Commonwealth Bank of Australia, said in a research report before the release. “The general property story is essentially part of the global search for yield. The conditions driving this search are likely to be the main area of RBA concern.”
Governor Glenn Stevens and the central bank board have lowered borrowing costs by 2.5 percentage points since late 2011 to 2.25 percent in February as they try to boost industries like construction as mining investment ebbs. In the housing market, the associated fall in mortgage rates has spurred a 35 percent jump in Sydney house prices from a 2012 trough that is an increasing risk to economic stability.
“Ongoing strong speculative demand would tend to amplify the run-up in housing prices and increase the risk that prices in at least some regions might fall significantly later on,” the RBA said, referring to the high proportion of property investors in the market. “Indicators of household stress are currently at low levels, but could start to increase if labor market conditions weaken further than currently envisaged.”
Australia’s labor market has been weakening and the unemployment rate is above 6 percent as a mining investment boom winds down and commodity prices drop. The RBA noted that the risk of oversupply in housing is most evident in inner-city Melbourne, where apartment construction has been high for a number of years and the rental market “looks fairly soft.”
Investors accounted for a record 51.4 percent of mortgages excluding refinancing in January, up from 46.2 percent a year earlier, Australian government data show. The International Monetary Fund estimated in October that Australia has the most overvalued housing market on a price-to-income basis after Belgium. The median asking price for a detached property in Sydney topped A$1 million ($787,000) in November, according to SQM Research Pty. The median price of homes listed in New York is $554,000, according to real estate website Zillow Group Inc.
The RBA said it is “too early” to see the effects of measures introduced by local regulators designed to ensure lending standards remain intact. The Australian Securities and Investments Commission said Dec. 9 it would investigate banks’ provision of interest-only loans as part of a broader review by regulators into home-lending standards.
In general, the central bank said today that Australia’s banking system continues to perform strongly.
Commonwealth Bank of Australia, Westpac Banking Corp., Australia & New Zealand Banking Group Ltd. and National Australia Bank Ltd. -- named the four pillar lenders for a law that prevents them from buying each other -- reported A$14.8 billion combined profit for their latest six-month results, 6 percent higher than the corresponding period a year earlier, the RBA said.
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