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Upcoming supply tamps down property prices in Sydney

Central bank says bank profits healthy, but warns of downturn, weak property market and negative equity for some buyers

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A house with three bedrooms in Chatswood, a suburb north of Sydney, is up for sale again, after an auction was abandoned last June. A large pipeline of new homes has depressed prices.

Sydney

PROPERTY prices in Sydney face "further downward pressure" due to a large ongoing apartment pipeline, which has raised the level of risk to Australian households, the central bank said.

In its semi-annual assessment of the financial system, the Reserve Bank cited the danger of a "sharper downturn" in the global economy.

It said while banks' profits remain healthy, increased scrutiny and weaker property and housing credit add up to "greater-than-usual uncertainty" about their outlook.

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"Risks to the household sector have increased over the past six months, given weak housing market conditions," the RBA said on Friday in its Financial Stability Review (FSR).

"Indicators of financial stress remain low outside the mining-exposed regions, but the value of housing loans in arrears has drifted up from very low levels."

Australia is in uncharted territory, as property prices in Sydney and Melbourne - accounting for almost 40 per cent of the total - tumble while unemployment and interest rates remain low.

In addition, the surge in the housing market between 2012 and 2017 has exposed buyers late in the boom to the risk of having a loan worth more than their home.

This FSR thus focused on highlighting the potential threats at home and abroad, but noted no imminent dangers for now.

"Global economic growth has slowed and downside risks to activity seem to have risen," the central bank said.

"This increases the likelihood of a sharp decline in growth, which could be detrimental to financial stability."

The review warned that China's "delicate balance" between stimulating a slowing economy and addressing financial stability risks "could falter".

The RBA in February dropped a tightening bias in favour of a neutral stance for the cash rate, which has stood at a record low 1.5 per cent since 2016, as weakening consumer spending slowed economic growth.

The central bank on Friday highlighted Australians' high debt levels again, saying that households remain in a good position to meet their debts, but that the financial system's vulnerabilities have risen amid a deterioration in economic conditions.

It said housing-related risks would rise with a rise in unemployment - now at an eight-year low of 4.9 per cent - or "further substantial price declines".

The central bank estimated that Sydney and Melbourne housing prices would stay 40 to 50 per cent higher than in 2012.

But it said: "The large ongoing increase in the supply of apartments, particularly in Sydney, will put further downward pressure on prices."

While houses have an average financial buffer of a little over 21/2 years on their mortgages at current interest rates, almost 30 per cent of loans have no or little buffer.

In the former mining regions of Perth and Darwin, property prices have slumped 18 and 27 per cent respectively since 2014.

Queensland, Western Australia and the Northern Territory account for 90 per cent of all negative-equity mortgage debt.

Amid the gloom, the central bank remained confident that the financial system is more resilient following a wide-ranging inquiry into misconduct, higher capital levels and tighter lending standards.

It noted stress tests of the banks indicate they can withstand double-digit unemployment and house-price falls exceeding 30 per cent. BLOOMBERG