While the RBA has stated that this is a “low-probability” downside risk, it warns that a correction could mean that a significant share of projects currently in the residential construction pipeline is not completed than is currently assumed.
In its latest Statement on Monetary Policy, released last week, the central bank said a downturn could be triggered by a range of different factors.
“Low rental yields and slow growth in rents could refocus property investors’ attention on the possibility of oversupply in some regions,” the bank said.
“Although investor activity is currently quite strong, at least in Sydney and Melbourne, history shows that sentiment can turn quickly, especially if prices start to fall.
Softer underlying demand for housing, for example because of a slowing in population growth or heightened concerns about household indebtedness, could also possibly prompt such a reassessment.”
The RBA noted that housing prices had picked up over the second half of 2016, most notably in Sydney and Melbourne. The bank said this could see more spending and renovation activity than is currently envisaged.
While investor lending remained strong throughout the second half of 2016, the Reserve Bank noted that the average LVRs are continuing to decline, reflecting the effects of tighter lending standards prompted by regulatory measures.
“A significant portion of the increase in investor credit growth is also likely to reflect the extension of credit to investors settling the payment of newly completed apartments that were purchased off the plan at an earlier time,” the bank said.
Apartment oversupply risks remain
The RBA has flagged risks associated with the high level of building activity and the shift to higher-density buildings, despite the employment and investment benefits of a large pipeline of residential building work over the next couple of years.
“Much of the apartment construction is geographically concentrated, particularly in inner-city Melbourne and Brisbane,” the bank said.
“This increases the chance that (localised) oversupply could develop, and would exacerbate the effect on local area prices if that were to occur.
“In addition, because both approval lags and completion times are longer for apartments, developers might not be able to respond in time to price or other signals of waning demand, so a general oversupply is more likely to build up.”
The RBA warned that if these risks materialise, there could be an increase in the proportion of newly completed apartments that fail to settle and a rise in the share of work yet to be commenced that is not undertaken.