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APRA this week wrote to Australian banks warning of the risks associated with commercial property, making repeated references to residential developments.
The regulator completed a review of commercial property lending in 2016 and the release of its observations this week prompted one MP at yesterday’s parliamentary inquiry to question Westpac CEO Brian Hartzer about conditions in the apartment market.
“We certainly agree that apartment prices in Sydney and Melbourne are very high,” Mr Hartzer said.
“We would draw the distinction between a speculative bubble in prices and prices that are beyond what the fundamentals would justify. The reason why I draw that distinction is because what we have seen in other markets from time to time is people get the view that house prices only ever go up, and they start borrowing money to buy a house with the view that they will sell it again in a year and buy a bigger house,” he said.
“That to me is the definition of a bubble, a credit-fuelled speculative bubble. I don’t think that’s what is happening in Sydney or Melbourne. I think what we are seeing in Sydney and Melbourne is the consequence of severe supply constraints running into a significant step-up in demand, albeit that’s now attenuating a little bit, from offshore buyers.”
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.
“I get an email on this every single week about the progress on individual buildings and how they are going at completing their presales,” he said.
“What we are seeing is with a building that had a high number of buyers particularly from China, they are struggling to get that through.
“In our credit policies, we are very conservative about the extent to which we would fund building like that anyway.”
Mr Hartzer said Westpac has no concerns about its current exposure to the apartment market.