The only thing growing faster than Australian apartment numbers is the line-up of analysts thinking prices will fall

Michael Smith / Newsmakers

Australia is building apartments at a pace never seen before.

About the only thing growing as fast as the number of new apartments being built is the number of analysts who are now calling for a price correction.

Stephen Walters, chief economist at the Australian Institute of Company Directors, is the latest to throw his hat in the ring, telling the Australian Financial Review that apartment prices will fall 10 to 15% over the next one to two years, something he believes will squeeze investors who have borrowed to negative gear and are heavily relying on capital gains.

“I think it’s going to get ugly, particularly in some parts of the market and for some lower-income cohorts who have borrowed,” Walters told the AFR.

Walters believes falling rents provides a “pretty strong price signal” that the apartment market is starting to adjust downwards.

“Rents are already off and given that a large part of the market is investor focused, that’s got to affect your price expectations and purchasing prices,” he says.

According to data from Corelogic, average rental rates fell by 0.3% across Australia’s capital cities in August, leaving the decline on a year earlier at 0.5%.

Over the same period, housing rents fell by 0.8%, while those for units increased by 0.7%. Both currently sit at record lows.

Mirroring the weakness in rents, gross rental yields also sit at the lowest level on record, pushed down by sharp property price growth and an increase in rental stock.

Source: CoreLogic

The view expressed by Walters follows a guarded warning from new RBA governor Philip Lowe yesterday in which he noted that “growth in rents is very low and there is a big increase in housing supply still to come”, a not-so-subtle hint that if capital appreciation were to slow or reverse, gross rental yields don’t offer much of a return based off current evidence.

In the RBA’s semi-annual Financial Stability Report released last week, the bank continued to warn Australians about a wave of apartment completions that are about to hit the inner city markets of Brisbane and Melbourne, and to a lesser extent Sydney.

It noted that “risks around the projected large increases in supply in some inner-city apartment markets are coming to the fore, especially in Brisbane and Melbourne”, adding that “there are signs that some settlements are taking longer and lending valuations are coming in below their contract price”.

You can read the AFR’s article in full here.

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