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J.P. Morgan says the central bank and prudential regulator will increase their regulatory oversight of the residential property market independently of cash rate movements.
Speaking at a breakfast event hosted by the Property Council of Australia late last month, J.P. Morgan vice-president of real estate equity research Ben Brayshaw said there is “very good reason” to be cautious about the residential sector as lending standards tighten.
“There is more uncertainty on foreign capital and we would argue that the RBA, in conjunction with APRA, is looking to play a greater regulatory role in residential, independent of monetary policy,” he said.
“We are seeing lending standards tighten up, so there are some very good reasons to be somewhat circumspect. Supply is part of the reason for that. The number of new apartments is starting to spike.”
J.P. Morgan sees the supply of new apartments potentially becoming an issue next year, primarily in Melbourne and Brisbane, and to a lesser extent in Sydney.
“In Melbourne you have got reasonably concentrated supply of construction in the Docklands and Southbank. In Brisbane it is similar as well, concentrated on the areas around South Brisbane and Fortitude Valley,” Mr Brayshaw explained.
“Sydney has similar dynamics playing out in pockets of oversupply in south Sydney and Parramatta.”
Mr Brayshaw admitted that there are “challenges in residential”, pointing to one key dynamic that is becoming increasingly difficult to predict: lending standards.
“The impact of banks potentially reducing LVRs and adopting a more conservative approach on apartment valuation imposes additional liquidity requirements on owner-occupiers and investors looking to settle.”
He added that J.P. Morgan will be watching the development of this over the next six to 12 months.
Earlier this month, BIS Shrapnel’s Building in Australia 2016-2031 report found that national dwelling commencements are estimated to have reached their peak over 2015-16, and will begin to decline in the coming year.
“After recording strong growth during the past four years, we estimate that total dwelling starts reached an improbable 220,100 in 2015-16, an all-time high,” said Dr Kim Hawtrey, associate director of BIS Shrapnel.
“From this level, national activity is forecast to begin trending down over the following three years, with the high-flying apartments sector leading the way down.”
According to Mr Hawtrey, while a sizeable dwelling stock deficiency, coupled with record-low interest rates, drove building activity to its current highs, almost all major markets will soon shift into oversupply.
“Low interest rates have unlocked significant pent-up demand and underpinned the current boom in activity, but with population growth slowing and a strong backlog of dwellings due for completion, new supply will outpace demand,” he said.
“This will see the national deficiency of dwellings gradually eroded and most key markets will begin to display signs of fatigue.”
[Related: 'Tsunami of supply' to hit housing markets]
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