RBA flags 'increasing risk' in property market

RBA flags 'increasing risk' in property market

by 1 comments

The Reserve Bank of Australia has warned of the increasing risk in one real estate market as prices rise ahead of rents and vacancy rates continue to climb.

Addressing the Australian Shareholders Association (ASA) Investor Forum in Sydney last week, RBA assistant governor Malcolm Edey spoke about regulatory measures taken last year to mitigate risks in the housing market.

“The second main area of risk focus domestically has been in commercial property,” Mr Edey said, adding that historically this sector has been a common source of financial instability both here and abroad.

“During the height of the GFC, Australian banks remained in comparatively good shape but they did suffer a noticeable deterioration in asset performance, with the aggregate non-performance rate rising to just under 2 per cent of loans,” he said.

“A significant part of that deterioration was in their commercial property lending. Impaired commercial property exposures accounted for around 30 per cent of Australian banks' non-performing domestic assets at that time.”

Mr Edey warned that the commercial property sector is again experiencing strong investor demand and bank lending to the sector is increasing.

“However, there are a number of emerging signs of increasing risk,” he said.

“Trends in commercial property prices and rents have been diverging over the past few years, with prices continuing to rise while rents have been flat to down. As a result, yields have declined. At the same time, vacancy rates have been increasing.”

As in the housing market, conditions in the commercial property sector have not been uniform across the country, and they have been noticeably firmer in Sydney and Melbourne than in other cities, Mr Edey noted.

“But the major commercial property markets have all seen downward pressure on yields over recent years,” he said.

“Strong demand from foreign buyers has contributed to this, reflecting the global environment of low interest rates and ‘search for yield’.”

Mr Edey said that while “the risks appear manageable at this stage”, they underscore the need for sound lending practices and for appropriate prudence by investors.

[Related: Rate hikes 'a significant blow' to housing affordability]

promoted content
Recommended by Spike Native Network
Listen to other installment of the Real Estate Business Podcast
reb top 100 agents 2017

With a combined sales volume of over $14 billion in 2017, the Top 100 Agents ranking represents the very best sales agents in Australia. Find out what sets them apart and learn their secrets to success.

featured podcast

featured podcast
Marnie Seinor on structure, database DNA and connecting with her local community

There’s no such thing as an “off switch” in real estate – so says McGrath agent Marnie Seinor, who came in at number 78 in this year...

View all podcasts

Does the benefit of being part of a branded group outweigh the cost?

Yes
No
Depends on the group
Do you have an industry update?