The RBA continued to warn Australians about the wave of apartment completions that are about to hit the inner city markets of Brisbane and Melbourne, and to a lesser extent Sydney, again today with the release of its latest Financial Stability Review.
But what’s interesting, or worrying to those who have purchased off the plan and are awaiting completion, is the chart in the RBA’s dedicated section examining banks’ exposures to inner-city apartment markets which shows apartment prices in the big three markets are already starting to slip.
That’s before the wave of supply hits.
The RBA warned 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”.
Crucially for prices going forward however, the bank added that “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”.
This point is a crucial one for apartment pricing because lower bank valuations mean buyers need to find more equity to complete the purchase, or fail to settle. When a buyer fails to settle, that apartment then moves from the sold column to the for sale column, adding to available supply in that market.
And housing markets are no different to other markets in the sense that a supply/demand imbalance can tip prices lower.
Just look at what the increase in supply for iron ore has done to prices even though tonnage through Port Hedland has continued to increase. Or think of what a small imbalance in the global oil market has done to the price of crude until OPEC started making noises about production cuts.
Supply matters. And it’s one of the reasons the RBA is worried and why the bank warns “the risks in some apartment markets are closer to materialising as the foreshadowed large and geographically concentrated increase in supply approaches”.
Worse yet, the RBA is not warning of a small overhang of apartments but a “marked oversupply” in these regions.
“Inner-city Melbourne is forecast to have the largest number of completions (around 16,000) over the next two years, followed by Brisbane (12,000) and Sydney (10,000),” the bank says.
But adjusted for size, the RBA says “in Brisbane and Melbourne these new apartments will represent a far larger increase in the dwelling stock than in Sydney”.
Which brings me to the chart of inner city apartment prices and rents on a six-month annualised basis.
The RBA shows all three markets are now starting to see prices fall – just as the wave of completions and the risks that poses is about to hit.
No wonder the bank is worried.
Giving a presentation on the economy yesterday, one which spent some time focussed on the risks associated with apartment completions, I was asked what would happen to the economy if prices fall materially.
Naturally we’d all hope that any falls in inner-city apartments is quarantined to those apartments and that geographical region. And the difference in the performance of housing markets across the US during the housing market collapse suggests that may be so here in Australia too.
But, much to the chagrin of then Fed chair Ben Bernanke, there was still an economy-wide housing collapse.
So the risk is, and this is why the RBA keeps warning of the danger, that the apartment completion wave depresses prices across the rest of these cities, and the country, in such a manner as to impact consumption and spending in the domestic economy.
No doubt that’s something the RBA, and its board, is on watch for and alert to.