Property risks rising with new supply pipeline

CoreLogic RP Data research director Tim Lawless said a default risk has emerged in parts of Australia where property prices are falling even as considerable numbers of off-the-plan homes come onto the market.

“Just over 250,000 new houses and units have been approved over the last 12 months, which is a record level,” he said.

“As we move into 2016 those approvals move into the commencement phase and then the completion phase.

“The risk is we are just starting to see the housing market softening as this new housing supply comes onto the marketplace.”

Mr Lawless said some building approvals will fall through due to some developers withdrawing from the market or the rate of pre-sales not being met as buyer demand cools.

“It doesn’t seem to be the case, at the moment, that we are looking at a market crash, but probably a modest decline in dwelling values,” he said.

“If we saw those declines become sharper or more concentrated in areas of new supply, I think that’s where the risks become substantially higher.”

Mr Lawless said off-the-plan buyers could struggle to settle purchases if a significant gap emerges between yesterday’s contract price and today’s valuation.

Buyers would also find it difficult to negotiate new terms with their bank given the tightened lending environment that emerged in mid-2015, he added.

According to the Housing Industry Association, new home starts increased for a third consecutive year in 2014-15 to a record 211,860 and are forecast to exceed 200,000 in 2015-16.

However, all that new stock is coming onto the market at a time when CoreLogic RP Data statistics suggest that both Sydney and Melbourne appear to be cooling.

Mr Lawless highlighted two things that would need to happen if the country was to avert a default crisis.

“Firstly, we would need to have a market situation where the settlement value compared to the contract value is roughly the same, if not higher,” he said.

“The other element that may avert some of the risk is if we do see changes or some relaxation in lending policies, which doesn’t seem to be on the cards either.”

[Related: Increased supply of housing 'has to be the answer': RBA]