Strong risk of oversupply as investor demand persists: RBA

The Reserve Bank of Australia has warned that strong investor demand could lead to risks of an oversupply of units in Melbourne and Brisbane.

In its latest Financial Stability Review the RBA reiterated many of its concerns around investor demand, as made in its September review, but yesterday flagged the risk that “robust investor activity” could lead to an excessive increase in construction activity and future supply overhang.

The review noted a “strong increase in higher-density dwelling approvals in inner-city Brisbane” in recent months.

“Some reports suggest that the vacancy rate has started to drift higher and that growth in rents has slowed of late,” the central bank said.

“In liaison, banks and other firms have conveyed some concern about possible future oversupply in this market,” it said.

Meanwhile the Melbourne property market is at risk of oversupply, the RBA warned.

“This appears most evident in inner-city Melbourne, where the level of high-rise apartment construction has been elevated for a number of years,” it said.

“The rental market already looks fairly soft, with relatively high vacancy rates and little growth in rents.”

Building approvals are currently at record highs after reaching a 30-year peak in 2014 when the Australian Bureau of Statistics recorded 197,571 approvals over the 12 months to 20 August.

More recent data on housing approvals has revealed the changing nature of Australia’s real estate market.

The number of dwelling approvals reached a record 19,282 in January, according to the Australian Bureau of Statistics.

That marked a 9.1 per cent increase on the previous year and a 5.7 per cent increase on the previous record result of 18,245 in November 2014.

Approvals for private sector houses fell 2.9 per cent to 9,449 – but this was more than offset by private sector multi-unit approvals, which jumped 23.6 per cent to 9,566.

January 2015 was only the second time that approvals for units have exceeded houses. However, Housing Industry Association economist Geordan Murray said this was not due to the poor performance of the detached house market.

“Changing consumer preferences, demography, affordability challenges and aspects of the policy environment are all contributing to the current situation where a larger share of new homes are in the form of attached dwelling,” he said.

Mr Murray said a sharp spike in unit approvals in Queensland had combined with solid levels of unit approvals in NSW and Victoria to lift the national total.

“These three states typically account for around 80 per cent of all multi-unit residential building and when you have all three performing strongly, it’s a recipe for a strong national result in this segment of the market,” he said.

Given the recent strength in building approvals, coupled with the time lags between approval and completion, significant new supply will continue to come on line over the next few years, the RBA said.

“Liaison suggests that a large amount of activity has been driven by foreign developers and foreign investors, with some of these developments consisting of smaller-sized apartments targeted at international students,” it said.

“These apartments may be difficult to sell in the secondary market if investors’ expectations of future student demand are not met, which could place downward pressure on prices, including in the broader Melbourne apartment market.”

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