Photographer: Phil Weymouth/Bloomberg News/Bloomberg

RBA Inner-City Apartment Alert Rises; Banks in Good Shape

  • Oversupply in Brisbane, Melbourne is ‘coming to the fore’
  • Non-performing mortgage loans picked up though remain low

Australia’s central bank intensified its alert on a potential apartment glut in central Melbourne and Brisbane, even as it reassured that the banking system remains in good shape.

“Risks around the projected large increases in supply in some inner-city apartment markets are coming to the fore,” the Reserve Bank of Australia said in its semi-annual Financial Stability Review Friday. “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.”

The shift in risk to developers reflects a scramble to meet property demand with the key interest rate at a record-low 1.5 percent, while declining mining investment is impacting resource-intensive regions. While house-price growth slowed and serviceability metrics have strengthened, the central bank noted the debt-to-income ratio has risen to 158 percent, a new peak.

“Non-performing mortgage loans have also picked up nationally but remain low,” the RBA said. “This pick-up has been most pronounced in mining areas where housing market conditions have deteriorated sharply, though only a small share of banks’ mortgage lending is to these areas.”

The Australian dollar was little changed following the release of the report, trading at 75.65 U.S. cents at 11:34 a.m. in Sydney.

Commercial Property

In commercial property, the divide between the resource and non-resource areas is pronounced: the northern city of Brisbane and western city of Perth, whose states were at the crucible of the biggest resources boom in a century, are experiencing “challenging conditions”; in the eastern cities of Sydney and Melbourne the markets are “performing strongly,” the RBA said.

Nonetheless, the review said the Australian banking system “remains in good shape” following a number of years of strong profit growth and efforts to strengthen lenders’ resilience.

It said there had been some worsening of the performance of banks’ New Zealand exposures, particularly to the dairy industry.

Australia & New Zealand Banking Group Ltd., Commonwealth Bank of Australia, National Australia Bank Ltd. and Westpac Banking Corp. -- known as the four pillars -- reported aggregate profit that was little changed in the latest half, after adjusting for a A$5 billion loss that NAB incurred on the sale of its U.K. subsidiary in February.

Bad Debts

“A sharp increase in the charge for bad and doubtful debts from low levels subtracted from profits as asset performance deteriorated across a number of portfolios,” the RBA said.

Yet it is the possible apartment glut that is a dominant theme in the review. One risk associated with large-scale construction is that off-the-plan purchases fail to settle. The RBA said liaison with the property industry points to some concern that this will become more common in Brisbane, Melbourne and Perth. These concerns arise from a combination of tighter financing conditions for purchasers, particularly for non-residents and those reliant on foreign income, and valuations at settlement below the contracted price.

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