ANZ warns on apartment ‘spill-over’

The major bank has identified a correlation between a supply-driven downturn in apartment prices in different capital cities.

In a research note, ANZ explained that the sheer number of apartments set to come to market over the next 18-24 months is raising fears of oversupply and the possibility of corresponding price falls.

The bank noted that Brisbane unit prices are already falling.

“A key question is whether a drop in prices in one market has implications for other markets. In the extreme case might a correction in apartment prices become a systemic problem for the economy overall? We think the possible spill-overs are an important issue for policy makers, risk managers, businesses and home owners,” ANZ Research said.

ANZ used a model for the cities of Sydney, Melbourne and Brisbane, and analysed the potential ‘spill-over’ effects of a shock to unit prices.

“Our model suggests that a decline in Sydney’s unit prices may have strong spill-over effects to both Melbourne and Brisbane,” the bank said.

“We also show that a price correction in Melbourne tends to affect prices in Sydney, but the impact is short-lived. On the other hand, a shock in Brisbane has no spill-over effect on the other cities.”

ANZ’s modelling comes after Westpac CEO Brian Hartzer last week clarified the group’s position on apartments amid oversupply fears.

Mr Hartzer told the House of Representatives economics standing committee that the property market cannot be looked at as a whole. He explained that different markets exist within each capital city and that the major bank assesses risk at a “granular level”.

“For example, if we take the Melbourne market. You can have a luxury apartment building in the Docklands, a high-quality build, and it’s fine – we will back those. A development from a good developer who has high-quality local buyers who want to move from the suburbs and have more of an urban life.

“You can go half a dozen blocks away and find another apartment building with a very small footprint targeted at overseas buyers who don’t plan to live there, and it’s in trouble,” he said.

“You actually have to go building by building. In our risk practices, we know what our exposure is to every single building in Australia, and we manage it at that level. When we do new developments, we look at who the developer is, what kind of property it will be, who the buyers will be, what’s their track record and exactly where it’s located. We go to a very granular level.”

The Westpac chief explained that Australia has seen “a significant ramp up in construction” and that a “fair chunk” of this has been targeting overseas buyers who have different ideas about the quality of property as local buyers.

“As a consequence, particularly of the crackdown in China of the outflows of capital, what we’re seeing in a number of those developments is the foreign buyers who put money down to buy an apartment are now having trouble settling,” he said.

“That is now potentially creating a bit of a glut of supply, which may or may not be what the local buyers want to buy.”

While some of these developments are starting to clear, Mr Hartzer said it is taking longer than expected. He added that Westpac is monitoring this area closely.

[Related: 'Historic boom will mean a historic reversal': BIS]

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