The combination of a record building boom and a slowing market could trigger a significant number of defaults.
CoreLogic RP Data research director Tim Lawless said a default risk has emerged in parts of Australia where property prices are falling even as considerable numbers of off-the-plan homes come onto the market.
“If we saw those declines become sharper or more concentrated in areas of new supply, I think that’s where the risks become substantially higher,” he told REB in a video interview.
Mr Lawless said off-the-plan buyers could struggle to settle purchases if a significant gap emerges between yesterday’s contract price and today’s valuation.
Buyers would also find it difficult to negotiate new terms with their bank given the tightening lending environment that emerged in mid-2015, he added.
According to the Housing Industry Association, new home starts increased for a third consecutive year in 2014-15 to a record 211,860 and are forecast to exceed 200,000 in 2015-16.
However, all that new stock is coming onto the market at a time when CoreLogic RP Data statistics suggest that both Sydney and Melbourne appear to be cooling.
Mr Lawless highlighted two things that would need to happen if the country was to avert a default crisis.
“Firstly, we would need to have a market situation where the settlement value compared to the contract value is roughly the same, if not higher,” he said.
“The other element that may avert some of the risk is if we do see changes or some relaxation in lending policies, which doesn’t seem to be on the cards either.”