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Apartment oversupply 'scary flavour of the month', says leading economist

Two of Australia’s most respected economists have addressed fears of an apartment bubble, following one bank’s decision to crack down on lending to high-rise and high-density dwellings in up to 120 postcodes.

Earlier this week, the Australian Financial Review reported that Macquarie Bank will curb high-rise and high-density apartment lending amid growing concerns about falling demand and oversupply.

Confirmation came as Macquarie Bank revealed that from 23 May it will require a maximum loan-to-value ratio of 70 per cent, which means buyers will need an additional 10 per cent deposit on their selected apartments.

The bank also revealed the suburbs that will be affected by the new policy, including Sydney’s The Rocks, Haymarket, Millers Point and southern suburbs, Melbourne’s Docklands and South Wharf, and more than 40 postcodes spread throughout Queensland, including the Gold Coast and Brisbane’s CBD.

Some areas in Adelaide, Perth and North Hobart are also said to be affected.

Commenting on Macquarie Bank’s decision, Domain Group chief economist Andrew Wilson told Mortgage Business that much of the concern surrounding the so-called oversupply is inflated.

“I guess it’s the scary flavour of the month, isn’t it?” Mr Wilson said.

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“We’ve moved from the [housing] bubble. That’s moved to one side because we’ve had an orderly correction in Sydney and Melbourne.

“There are no prices falling off the cliff as was predicted quite tiresomely through the last couple of years while prices were rising, so we’ve now moved on to this ‘oversupply’ headline-grabber.”

Mr Wilson suggested that the reasoning behind Macquarie Bank’s decision may be misguided.

“The very nature of high-rise construction is that supply moves ahead of demand, we just don’t have a big queue of buyers waiting. It takes two or three years for these projects to be completed anyway ... that’s just the nature of the differentials of supply and demand for high-rise construction,” he said.

“It creates jobs and economic energy just when Australia needs it. The significant construction and economic drive that we’ve had from high-rise apartments [and] developments in most capital city markets have been a godsend [because] we needed to find another driver for the economy after the resources boom finished.

“This is what the Reserve Bank wants with falling interest rates – to create the dynamic of new economic activity, particularly through new construction.”

CoreLogic RP Data senior research analyst Cameron Kusher also offered some insights on the concerns surrounding apartment oversupply in some areas, adding that he’s not surprised by Macquarie Bank’s decision to crack down on lending to high-rise and high-density dwellings.

“At the moment, we are seeing the highest level of new unit construction on record, culminating in an expected 231,129 capital city units to settle over the next 24 months,” he said.

“When you have a record high number of apartments being delivered into a slowing market where value growth for units has tended to lag [behind] that of houses, it is no wonder there are some concerns.

“Also keep in mind that units are more than twice as likely to be rented [than] houses, so many of these properties will end up in the rental pool, which is the weakest it has been in more than 20 years.”

While Mr Kusher acknowledged that a lot of recent apartment approvals won’t be brought to fruition, he said there are some immediate risks.

“A lot of the recent approvals won’t be constructed because they can’t get the necessary number of pre-sales; however, there is already a record-high number of units under construction,” he said.

“This is where the immediate risks lie.”

Mr Kusher admitted he’s unsure of how the apartment oversupply concerns will pan out.

“It is all really crystal-balling at the moment, but when you have slow growth in unit values, a weak rental market [and] an evolving lending environment where LVR limits are in place from some lenders, there is an increasing probability that not all of these units which have contracts and are under construction will be able to settle,” he said.

“Of course, time will tell if this is the case, but lenders are wise to be cautious about these risks.”

[Related: 'Investors are supporting supply']

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