There’s another major risk emerging in the Australian apartment market

MELBOURNE, AUSTRALIA – MARCH 03: A view from The Melbourne Shrine of Rememberance showing the new Grocon apartment building block at the former Carlton United and Brewery site on Swanson Street on March 3, 2015 in Melbourne, Australia. William Barak was an elder of Melbourne’s Wurundjeri tribe, an artist and activist who worked towards building bridges between black and white cultures. (Photo by Pat Scala/Getty Images)

APRA, Australia’s banking regulator, has been on a crusade to rein in what had been the rampant growth of lending for housing investment since 2014. They instituted a 10% growth cap to limit for banks, credit unions, and building societies in a bid to put the brakes on lending growth.

It also meant the availability of credit to borrowers for investment properties is now limited. That potentially poses a problem for buyers who think they have bank approval, or think they’ll be able to get it, when an apartment construction ends and they are due to settle on a purchase.

That risk was acknowledged by the RBA in its latest Financial Stability Review.

The RBA said the “actions of the regulators since late 2014 have helped induce a tightening of authorised deposit-taking institutions’ (ADIs) housing lending standards, and housing market conditions have moderated since the previous Review”.

That’s contributed to risks shifting from “housing lending towards lending for residential development” in the past six months, the bank said.

That’s because, while APRA’s measures “generally enhanced resilience in the household sector”, the problem is that if borrowers can’t settle because they can’t source the funds from a bank, then the developer’s ability to repay their loans becomes a problem and that ultimately means the risk shifts to their bank or lender.

“Tighter access to credit for households could pose near-term challenges in some medium- and high-density construction markets given the large volume of building activity that was started several years ago,” the FSR states.

Remember that the RBA’s head of financial stability recently warned of the impact of the “slower builder” as apartments are rushed toward completion with builder”s in full knowledge that “not all the projects underway will make money, but yours will if you can just complete it before the other guys complete theirs”.

As if to highlight this is a real risk to Australian apartment builders – and ultimately buyers – if oversupply impacts prices, the latest release of the Rider Levett Bucknall (RLB) Crane Index, for Q2 2016 showed the numbers of cranes in the key mainland cities within Australia, has risen by 145% since the commencement of the Crane Index in Q4 2013.

Because “these apartments are popular with investors and foreign buyers… 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,” the RBA said.

They identified Melbourne and Brisbane’s inner city areas at the greatest risk, along with a growing risk in Perth.

But they also said there “is little evidence” demand has collapsed yet.