Photographer: Brendon Thorne/Bloomberg

RBA Sees Risks Shifting to Aussie Home-Builders From Home-Buyers

  • Slowdown in Chinese demand for properties a risk to developers
  • Commercial property in Brisbane and Perth also under pressure

Australia’s central bank said lending risks in the economy have switched to residential developers from home buyers because of a possible apartment glut in inner-city areas.

The problem is probably worst in central parts of Melbourne and Brisbane, where new supply is geographically concentrated, and increasingly in Perth, state capital of resource-rich Western Australia, the Reserve Bank of Australia said Friday in its semi-annual Financial Stability Review.

“These apartments are popular with investors and foreign buyers,” the RBA said. “Any concerns over settlement risk and/or a slowdown in demand for Australian-located property by Chinese and other Asian residents could lead to difficulties for particular projects.”

Anecdotal evidence that Chinese nationals have been scooping up local property is now showing in data, with Australian government approvals for buyers from China doubling in the 12 months through June 2015. The concern is that if China’s economic slowdown triggered a decline in demand then this could weigh on Australian property prices and lead to losses on banks’ broader property exposure, the RBA said.

The central bank said its liaison suggested that developers in the northern city of Brisbane “are having increasing difficulty securing pre-sales, leading to wider use of rental guarantees and other buyer incentives, project delays, and in some cases sales of development sites.”

Perth Problem

The RBA said conditions in the western city of Perth “have also deteriorated” as new apartment supply is being sold into an economy struggling with unwinding mining investment and rising unemployment.

“A downturn in apartment markets could weigh on developers’ financial health through a number of channels,” the RBA said. “Values of sites and incomplete developments would be likely to fall the most, and the value of apartments held on developers’ books would also decline.”

In commercial property, risks vary across markets, according to the central bank. Foreign investors, especially from China and elsewhere in Asia “have been an important factor behind the marked compression in Australian commercial property yields by contributing” to the rapid price growth.

Good Condition

The RBA said conditions are particularly weak in Brisbane and Perth, as new supply coming on line drives up vacancy rates. In contrast, conditions in Sydney and Melbourne “are much firmer and have improved over the past year,” the RBA said.

Still, the review states that the Australian financial system remains in “good condition overall” and banks’ profitability is high.

Australia & New Zealand Banking Group Ltd., Commonwealth Bank of Australia, National Australia Bank Ltd. and Westpac Banking Corp. -- known as the four pillars -- reported headline profit of A$16 billion in the latest half. While that was down 7 percent on the year earlier period, the decline largely reflected the effect of “extraordinary items,” including writedowns on capitalized software, the RBA said.

One area of concern abroad for Australia’s banks is New Zealand, where they are heavily represented and where international milk prices have plunged and house prices have surged.

Before it's here, it's on the Bloomberg Terminal.