RBA highlights apartment construction risks

by Miklos Bolza13 Feb 2017
The rapid growth of high-density apartments in certain capital cities could result in a number of key risks to the property market, according to the Reserve Bank of Australia (RBA).

In its Statement on Monetary Policy released on Friday (10 February), the RBA discussed the dangers that the geographically concentrated nature of apartment dwellings could pose, particularly in cities such as Brisbane and Melbourne.

“This increases the chance that (localised) oversupply could develop, and would exacerbate the effect on local area prices if that were to occur.”

Furthermore, since apartments typically come with longer approval processes and completion times, developers may not be able to respond in time to any signals of waning demand, the RBA warned. This may result in a build-up of general oversupply.

“If these risks materialise, there could be an increase in the proportion of newly completed apartments that fail to settle and a rise in the share of work yet to be commenced that is not undertaken.”

Approved apartments take around six quarters to complete, the RBA said, which is three times longer than for detached houses and twice as long as for townhouses. This means the actual pipeline of work can be used as an indicator on dwelling investment further into the future.

However, the RBA cautioned that the longer lag between the decision to build a high-density apartment and its completion led to less predictable impacts on the overall supply of housing.

In recent years, high-density building approvals took up around half of all residential building approvals, the RBA said. This was far above the long-run average of less than one third.

There has also been a shift towards higher-rise apartments within the high-density segment, the RBA said. The number of apartment blocks with four or more storeys accounts for around one third of total building approvals, up from around 10% in 2010.

The trend towards high density dwellings is in line with international norms, the RBA said, especially since Australia’s housing stock is unusually concentrated in detached houses and our cities are very low density in comparison to other industrialised economies.

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