Australia’s big four banks facing a looming time bomb

More than 230,000 brand new apartments are expected to settle within the next 24 months, thanks to record-high levels of construction, but they represent a significant risk for Australia’s big four banks.

More than 80,000 apartments and units are expected to settle in both Sydney and Melbourne, with Brisbane expected to see 44,000 units settle within the next 2 years, according to CoreLogic RP Data.

Source: CoreLogic RP Data

Source: CoreLogic RP Data


The problem comes when you compare the average number of unit sales annually over the past five years with a big disconnect appearing. The historic sales figures include sales of both new and existing apartments, and new stock usually accounts for a smaller slice of total sales than resales of existing stock.

In other words, thanks to builders building record numbers of apartments and units in the past few years, the property market could see thousands of apartment owners forced to slash their asking prices to compete against the wave of units already on the market. As more apartments come up for sale, there’s more downward pressure on prices, perhaps forcing even more apartments onto the market.

It also means that capital growth for units – which is already much lower compared to houses – may be negative or much less than buyers had expected, leaving them in a precarious position. As an example, an investor looking to settle on a new apartment may have expected a $50,000 paper profit, but instead is looking at a $20,000 loss that could impact on their other assets (perhaps forcing the sale of other property investments).

Then there’s the buyers’ market which has changed substantially in the past year or so. The banks including Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) have tightened their lending criteria for investors, narrowing the market for units – and investors are the major buyers of apartments.

Apartment sellers may struggle to attract much interest given the competition and fewer buyers in the market.

Foreign buyers have also been drastically reduced with 3 of the 4 banks announcing they no longer lend to foreign investors. A large proportion of off-the-plan apartments are sold to foreign buyers.

Settlement valuations could also cause huge issues. Because many apartments, particularly in Melbourne, Brisbane and Perth are predominantly in similar locations within 10kms of the city, and all coming onto the market at once – valuations may not meet the contract prices, which could see some buyers unable to pay and default.

Foolish takeaway

It’s a situation worth watching as it could escalate and affect detached home prices, which are already cooling in most states. A crash in the property market would be bad news not just for homeowners but the major banks and their shareholders.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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