Sydney apartments pose financial stability risks, Australian central bank says

Tradesmen work on the roof of a new building at a housing development in the western Sydney suburb of Oran Park, on Oct 21, 2017. PHOTO: REUTERS

SYDNEY (BLOOMBERG) - The apartment market in Australia's largest city is "quite soft" due to a sharp rise in supply that has increased risks to financial stability, a senior central bank official said.

Sydney added more than 80,000 apartments in the past few years, increasing the city's housing stock by about 5 per cent, Reserve Bank of Australia assistant governor Michele Bullock, who oversees the financial system, said in the text of a speech. In Melbourne and Brisbane, which also saw substantial construction, apartment prices have so far held up, she said.

"Our main concern with this from a financial stability perspective is the potential for this large influx of supply to exacerbate declines in housing prices and so adversely impact households' and developers' financial positions," Ms Bullock said in Perth on Wednesday (March 20).

"Currently, the risks here appear to be elevated but contained."

The RBA has dropped a tightening bias in favour of a neutral policy stance as signs mount that tumbling property prices - down 13.2 per cent in Sydney - are prompting consumers to rein in spending and slowing economic growth. The central bank has kept interest rates unchanged for 2½ years at a record-low 1.5 per cent, and markets now expect a quarter-point cut by year's end.

The Australian dollar fell as much as 0.4 per cent after Ms Bullock's comments.

Her boss, Governor Philip Lowe, has noted that a key problem in the east coast housing market had been the slow response to demand pressures. That resulted in Sydney property prices surging 75 per cent in the five years to mid-2017. By the time the swathe of new apartments came online, the demand had fallen away and prices slid.

The property market has also been hit by tightening credit as banks scaled back lending to investors and more heavily scrutinised borrowers in the wake of an inquiry that revealed widespread misconduct in the finance industry.

While Ms Bullock said that evidence pointed to reduced demand for credit as a bigger factor in the housing slump than tighter lending conditions, the RBA is still worried about banks shying away from some loans.

"All we can do, and all the bank can do, is continue to encourage the banks," Ms Bullock said following the speech. "Please think very hard about whether or not your lending standards are too tight, and whether you can loosen up a bit."

In her speech, Ms Bullock highlighted two key risks to financial stability: Household balance sheets, as declining apartment prices negatively impact households that purchased off the plan and are yet to settle, and for developers delivering completed apartments into a cooling market.

If people who had pre-purchased are having difficulty getting finance, or decide it's not worth going ahead with the purchase, there would be increasing settlement failures.

"The apartment market is quite soft in Sydney," Ms Bullock said. "Apartment prices have declined since their peak, rental vacancies have risen and rents are falling."

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