The Reserve Bank has left interest rates on hold at 1.50 per cent.
THE RBA is closely monitoring the Brisbane and Melbourne apartment markets, amid fears a looming oversupply could leave banks and investors in financial ruin.
Assistant Governor Michele Bullock addressed a business breakfast in Sydney on Tuesday, where she said equally concerning for the Reserve Bank was investors who have entered the market across Australia under the false assumption that property prices will always rise.
She expressed concerns the belief could fuel a wider than expected property crash in the event of an economic downturn and said it was a situation the bank was closely monitoring.
Ms Bullock said with household debt at record levels and investment activity rising, the bank was concerned some household budgets may not cope with a recession.
She said the cyclic nature of the economy meant a downturn was inevitable and, “something will come from left field that no-one was expecting” to cause it.
In that event, she said, risky investments, such as apartments, would be the first thing offloaded and quickly.
“(There) are indicators there might be risks being taken on that in the event of a downturn might result in systemic issues for the banking system,” she said.
“Everyone would be aware investor housing growth has started to speed up again and … investors can be the first to get out, if things turn down.
“We are watching this carefully.
“The other thing we worry about … is there evidence people are seeing prices rise and they think prices will always rise?
“If that happens, what happens when things turn down?
“Will the slump be much bigger than it might otherwise be?”
In terms of where the greatest risk is, Ms Bullock identified both the Brisbane and Melbourne apartment markets, where high rise construction is in overdrive.
She said the RBA is keeping a close eye on the looming oversupply, with concerns a crash in prices could leave banks and investors in financial ruin.
Sydney, however, had no such issues.
“The thing we have highlighted … is the looming oversupply in Brisbane in particular and possibly some parts of Melbourne, not so much Sydney,” she said.
“The concern there is about the resilience of the financial institutions …, that if there is an oversupply and fall in prices that the financial institutions don’t end up underwater or wearing larger losses than they expected.”
Of equal concern was the impact it could have on investors in those markets, Ms Bullock said.
“Have households purchased these apartments on the expectation of rents and rising prices? With a glut they might not be able to rent them out and may not get the price they paid for it,” she said.
“It’s all focused on the resilience of the balance sheets, if these markets turn down.”