Off-the-plan properties are under threat
Off-the-plan, pre-sold properties are under pressure on a number of fronts according to the Reserve Bank of Australia's Financial Stability report for October.
First there are settlement risks on pre-sold apartments as a result of increased interest rates for investment and home loans by the banks.
Second residential developers are under pressure from an oversupply in certain cities that is driving down apartment prices.
Third there is a decline in international students who have helped fuel the apartment market.
But the RBA stressed that pre-sale defaults have been very limited so far.
The RBA says the risk of a downturn in apartment markets is greatest in the inner-city regions of Melbourne and Brisbane because of an oversupply of apartments.
While investor demand appears strong at present, including from foreign investors, apartment markets in these areas already look soft, and future tenant demand, including from international students, is uncertain, explains the RBA.
Recent international student net arrivals were less than the Department of Immigration and Border Protection's forecasts. As well the Department's forecasts for student numbers over the coming years have been revised down significantly.
Also more generally the RBA says that population growth has slowed noticeably of late.
"Any downturn in apartment market conditions would weigh directly on the developers' equity in projects underway, and would increase the risk of off-the-plan sales falling through," says the RBA.
Already a number of banks have responded to the risk of oversupply of apartments by tightening lending standards to apartment developers in the more at-risk areas.
"The large volume of apartment construction currently underway and planned has continued to grow, and the price of development sites has increased rapidly due to strong developer demand," explains the RBA.
"Foreign developers have contributed to this dynamic, and are reportedly willing to pay more for development sites than many local developers."
The RBA says that so far, the near-term risks to the domestic financial system from the commercial property sector appear modest, but they are rising.
Although banks' commercial property exposures declined as a share of their total assets after the financial crisis, growth in this type of lending has picked up in recent years, driven by the major Australian banks and by Asian-owned banks.
While competition among lenders is strong, putting considerable pressure on lenders' margins, the RBA says the commercial property sector will require continued close monitoring for some time yet.