RBA warns of inner city mortgage risks

by Miklos Bolza17 Oct 2016
Increasing numbers of apartments both newly built and under construction in capital cities raises the risk of a significant oversupply in select regions, the Reserve Bank of Australia (RBA) has warned.
 
In its monthly Financial Stability Review, the RBA has examined mortgage exposures for the Australian banking system in the inner city areas of Sydney, Melbourne and Brisbane.
 
“Risks around the projected large increases in supply in some inner-city apartment markets are coming to the fore, especially in Brisbane and Melbourne. There are signs that some settlements are taking longer and lending valuations are coming in below their contract price, though settlement failures to date remain low,” analysts wrote.
 
However, they suggest that banks would experience material losses on development lending rather than on mortgages if market conditions were to deteriorate in these areas. This is because there is a greater likelihood of default and higher loss-given-default on development lending than on mortgage lending for apartments.
 
By looking at total Australian mortgage and development lending, the RBA was able to estimate how exposed the banks were to a downturn in these inner city markets.
 
“The data suggest that around two to five per cent of banks’ total outstanding mortgage lending is to inner city Brisbane, Melbourne and Sydney, and this share is likely to grow as the apartments currently under construction are completed,” The RBA said.
 
Total mortgage exposures equal $20 to $30 billion and are expected to be larger in Sydney due to the greater number of mortgaged dwellings and higher apartment prices. In Melbourne and Brisbane, mortgage exposure is estimated to be around $10 to $20 billion.
 
“By contrast, the available data suggest that around one-fifth of banks’ total residential development lending is to these areas.”
 
Mortgage lending in Sydney was generally safe, the RBA said, as “a very large price fall would be required before the banks would experience sizeable losses”. This was because rapid price growth has increased borrower equity in their apartments and hence lowered the losses-given-default.
 
Apartments in inner city Brisbane and Melbourne presented a slightly greater risk in terms of mortgage exposure, analysts said, with high losses expected if prices fell more than 25%.

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