RBA: Property investors could feel the squeeze of apartment oversupply

Property investors could be at risk, according to an RBA report, due to a growing supply of apartments combined with a decrease in demand in some areas.

The RBA said that “a downturn in apartment markets could weigh on developers’ financial health through a number of channels.” The main areas of declining value it identified included that of building sites and unfinished property developments as well as the value of investment apartments.

According to the report, a looming oversupply of housing, particularly apartments, poses an ongoing risk to the Sydney, Melbourne, Perth and Brisbane markets.

It was predicted that this, “significant and geographically concentrated growth in supply of new apartments...may weigh on prices and rents in these areas.”

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This spells bad news for investors with a mortgage, who may face high loan repayments while earning lower income through rent - and with the oversupply of housing, particularly apartments, may not be able to sell their property for a price that recoups the losses.

Last year, for an investor with a one bedroom apartment in Sydney’s inner suburbs, the average weekly rent rose from $450 to $590 between the first and third quartiles. So, if the current shifts in the housing market caused rent prices to drop back to first quartile levels, investors would be losing out on $140 a week, or nearly $600 a month.

In order to find potential buyers or renters, Aussie investors may have to look to the Asian market, particularly Chinese buyers, who the RBA flagged as accounting “for a significant and increasing share of purchases” in the Aussie housing market.

The report suggested that although at present Chinese buyers represented “a small fraction of overall market activity,” any potential decline in interest from this sector, due to factors such as a downturn in their own economy, or domestic policy that limited Chinese investment in foreign markets, could weigh heavily on Australian housing markets.

With the property market in flux, it’s more important than ever for Aussie investors to have a strong financial strategy in place. Check out our tips to make your investment apartment work for you, below:

Tips for investors

• Build a financial buffer. If rent prices drop, will you still be able to pay bills and afford mortgage repayments? Find a high interest savings account and start building up a financial safety net, just in case.
• Make sure you’re covered. Does your insurance cover you for little accidents caused by your tenants? How about big ones? Misfortune can wind up resulting in a big bill and if you aren’t careful, there goes your financial buffer. Make sure you’re protected with landlord insurance.
• Review your rates. Is your mortgage the best it can be? Home loan rates change all the time, so keep an eye on our investment home loan comparison to make sure you’re not paying too much on your current mortgage.