Shadow banks inflating apartment risks

by Miklos Bolza22 Sep 2017
Construction growth in Australia’s apartment and unit sector is under threat due to the rise of the shadow banking system, one leading economist has warned.

Speaking at the HIA-CoreLogic Construction Outlook Breakfast Series in Sydney yesterday (21 September), Westpac chief economist Bill Evans explained why greater numbers of alternative lenders were putting apartments at risk.

“In previous periods, projects typically attract about six to eight financiers (obviously the four majors and a few others). On projects now, you’ve got 20 plus financiers getting involved – hedge funds, investment funds, foreign banks – and all of that money is more expensive than the money that used to be available from the banks.”

Along with this, he predicted that a slowdown in construction lending was assured due to a number of other factors related to the loans themselves.

Using data gathered from 80 development projects around Australia that Westpac had in-depth information on, Evans said that while 5% of all loans had late settlements on average in the past, this was much higher now with percentages varying between Sydney, Melbourne and Brisbane.

“What proportion failed to settle altogether? It used to be 1%. That number is significantly higher today. What proportion have the valuation below the contract value? That number is now much, much higher than we’ve seen in the past.”

These factors, combined with a downturn in the number of foreign investors, mean the number of apartment approvals will continue to fall, Evans said.

RBA crashes the party

Evans also turned his attention to house prices, especially the effect of rate changes by the Reserve Bank of Australia (RBA).

“House prices fell in ‘08 and they fell in ‘11. On both occasions, the Reserve Bank came to the party. In ‘08, they cut the rate from 7.25% to 3% and in ‘11 they cut the rate from 4.75% down to the current 1.5%. Both times when house prices were falling, the Reserve Bank played an important role.”

This also happened in 2015/16 when the RBA cut rates again, Evans said, but would not happen again in the near future as rates would not fall any further, he predicted.

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