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Melbourne apartment risks mount as prices drop by most since 2014

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Apartment prices in Melbourne fell at the fastest pace in more than two years in November, reinforcing concerns about a looming oversupply of units in Australia's second-largest city.

[SYDNEY] Apartment prices in Melbourne fell at the fastest pace in more than two years in November, reinforcing concerns about a looming oversupply of units in Australia's second-largest city.

The 3.2 per cent month-on-month drop is the largest such decline since May 2014, according to figures from data provider CoreLogic Inc. This dragged down the overall increase in dwelling values across the nation's state capitals to 0.2 per cent, the smallest rise since March this year.

Record low interest rates put in place by the Reserve Bank of Australia to help ease the economy's shift away from mining investment and combat low inflation have helped to spur a housing boom in the nation's biggest centres and the central bank has repeatedly voiced concern that apartment gluts are developing in central Melbourne and Brisbane.

"Risks around the projected large increases in supply in some inner-city apartment markets are coming to the fore," the RBA said in its quarterly financial stability review in October.

Shayne Elliott, chief executive officer of Melbourne-based Australia and New Zealand Banking Group Ltd, said Wednesday that the lender had become increasingly cautious about parts of the housing market. He warned about pockets of over-building, particularly in the small apartments segment.

"There are emerging signs of stress" in the economy, the head of Australia's third-biggest bank told a Reuters event in Sydney.

The difficulty for both the RBA and commercial lenders in judging the state of the market is that in other areas house prices have been accelerating. In Sydney, where auction clearance rates have been around the 80 per cent mark for the past three months, the median dwelling price has risen to A$845,000 (S$900,300).

Rental yields reached a new record low in November across the state capitals, CoreLogic said, with house prices continuing to increase at a faster pace than rents.

The overall rate of price increases has cooled compared to previous months, said Tim Lawless, CoreLogic's head of research.

"Affordability constraints are creating high barriers to entry, particularly in Sydney, and lenders are becoming more cautious in their lending practices," he said.

"The supply pipeline is substantial for inner city units, which is likely to dampen value growth in these precincts as well as dent buyer confidence and push vacancy rates higher."

BLOOMBERG