The Reserve Bank of Australia (RBA) has said new developments in Melbourne may appeal to a relatively narrow segment of tenant or owner demand, creating further risk of oversupply.
In its Financial Stability Review, the RBA said the risk of oversupply is higher in Melbourne where there has been greater concentration of building activity recently.
“Apartment construction in the inner city has been at high levels for some time and, given the time lags in completing higher density constructions, is expected to remain elevated for the next few years,” it said in the report.
“That said, liaison suggests that construction in Melbourne continues to be driven by strong demand, including from foreign investors, with pre-sale levels remaining high.”
The RBA also said some of the new developments may appeal to a relatively narrow segment of tenant or owner demand.
“For example, some new developments involve smaller-sized apartments that are targeted at international students, which could be harder to sell in the secondary market than more traditional-sized apartments,” it said.
“This could place downward pressure on apartment prices if student demand weakens or if there are other shocks that reduce foreign investors’ appetite for these apartments.”
Despite the activity and housing price inflation in the Sydney and Melbourne property markets, rental yields have not declined to a significant extent and vacancy rates in these cities remain fairly low, the RBA added.
“However, rental yields may come under pressure if the momentum in housing price inflation continues,” it said.
“Households should therefore be mindful of the risks when making investment property decisions in these conditions.”