MNI:RBA Kearns: Apartment Construction Could Amplify Hsg Cycle

By Sophia Rodrigues

     SYDNEY (MNI) - The Reserve Bank of Australia is closely monitoring

developments in the apartment building sector as loans for such developments

tend to be riskier than residential mortgage loans and as an increase in foreign

buying could amplify the housing cycle.

     The RBA's views were relayed by the central bank's head of financial

stability, Jonathan Kearns, in a speech in Sydney on Monday.

     "One part of the commercial property sector that the Reserve Bank has been

watching closely is loans for the development of residential property. The surge

in apartments recently completed and under construction in the major cities

raises the risk of price falls," Kearns said.

     He noted that a large share of banks' commercial property lending is for

construction and development, including for large apartment buildings.

     These loans tend to be riskier because the property isn't yet earning rent,

problems can arise in the often complex construction phase, and market

conditions can change in the several years or more it takes to complete large

projects, he said.

     Also, losses can be greater on lending for commercial properties than for

residential properties because borrowers with a limited liability company

structure have less incentive to repay than individual residential mortgage

borrowers who face full recourse, he added.

     Kearns noted that there have been increased purchases of dwellings by

foreign buyers, particularly for investment purposes, in the recent housing

cycle, which the RBA is watching. This is "a more recent phenomenon and so their

impact on the housing cycle is less clear," he said.

     Overall, Kearns' comments were in line with what the RBA has already said

in the twice-yearly Financial Stability Review published last month.

     Kearns repeated that the high level of household mortgage borrowing brings

risks for both lenders and households.

--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com

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