CANBERRA: The Reserve Bank is increasingly nervous that the flood of apartment developments and under-utilised office towers has left the economy more vulnerable to a global shock, sparking a fresh warning for banks to be extra vigilant.
In its semi-annual review of financial stability, the RBA warned the most pressing risks had shifted from mortgage lending to commercial property and apartment developments, flagging that a major slump in Chinese demand could dent prices and banks’ “broader property-related exposures”. The RBA claimed the economy’s pressure points — along with stress in resource-related companies — could “exacerbate a major shock from elsewhere, such as a global economic downturn” and emphasised that banks must not ease lending standards.
Aware that commercial property losses nearly destroyed banks in the early 1990s recession, the RBA singled out the “particularly weak” Perth and Brisbane office markets, where vacancy rates are 24.5 per cent and 18.2 per cent, the highest since at least 1993. “Given the increase in risk, commercial property lending, including for residential development, will require continued close monitoring for some time yet,” the RBA said, noting lending had picked up in recent years.
The RBA’s pointed warning came as further evidence emerged that China’s economy — the world’s second-largest and the biggest consumer of Australia’s exports — was slowing. First-quarter GDP cooled to an annual rate of 6.7 per cent, down 10 basis points from the prior three months but in line with market expectations.
Amid fears of a sharper slowdown in China, investors breathed a sigh of relief and pushed the S&P/ASX 200 stock index up 0.76 per cent to 5175.5. In late trade, the dollar was just north of US77c after the RBA’s warnings about the property market shut the door on a near-term cut in official interest rates.
But with regulators cracking down on bank practices since late 2014 and slowing lending to property investors, the RBA expressed concern that tighter access to credit could pose “near-term challenges” to higher-density construction markets reeling from building that started several years ago.
“These apartments are popular with investors and foreign buyers and any concerns over settlement risk and/or a slowdown in demand for Australian-located property by Chinese and other Asian residents could lead to difficulties for particular projects,” the RBA said.
“An ongoing risk comes from the significant and geographically concentrated growth in supply of new apartments in Sydney, Melbourne and Brisbane due for completion over the next few years.”
As broker CLSA forecast Beijing would let the yuan fall by 25 per cent, the RBA cited a sharp economic slowdown in China and tightening outbound capital controls as drivers that could cool the rampant demand for Australian property. Amid growing concerns about banks’ rising bad debts, the RBA said while non-residential commercial property conditions were strong in Sydney and Melbourne, other areas were bleak.
