Speaking to an Australia-China property conference, the RBA’s head of financial stability Jonathan Kearns said construction and development loans tend to be riskier because the property isn’t yet earning rent, things can go wrong in the often complex construction phase, and market conditions can change in the several years.
He said the run up in commercial property prices raises the risk of a sharp correction.
“The surge in apartments recently completed and under construction in the major cities raises the risk of price falls,” Mr Kearns said.
“The construction of new apartments has been largest relative to the existing stock in Brisbane and inner-city Melbourne, though it is largest in absolute numbers in Sydney.”
He said Chinese demand for Australian residential property has eased because of tighter capital controls imposed by Beijing and tougher restrictions on mortgage lending by Australian banks.
“Many foreign buyers come from China, seemingly around three-quarters,” Kearns said. “Purchases of new properties by foreign buyers have eased over the past year, reportedly because of stricter enforcement of Chinese capital controls and tighter access to finance for foreign buyers.”
While offshore demand for property has become a contentious issue amid sky-high house prices and complaints that locals are unable to afford a first home, Kearns pointed out that foreign demand did not reduce the supply of available dwellings overall and might actually drive the expansion of new supply.
“Foreign buyers in Australia for work or study would have been renting if they did not purchase,” he said. “Other foreign buyers rent the property as an investment and so contribute to the rental stock. Also, there are some new developments that only proceed because they get high pre-sales from foreign buyers.”