Moody`s, a credit rating agency, said investors investing in new high-rise apartments in Melbourne were twice as likely to fall into negative equity as Sydney, where the balance of loans exceeded asset prices.
Moody`s data analyzed securities valued at $287 backed by residential real estate mortgages in Australian dollars, showing that buyers of high-rise apartments in Melbourne`s inner city on average had `extra capital` of 7.6%, compared with 19.7% in the inner city of Sydney. Brisbane has 10%.
The difference in capital levels is mainly due to differences in apartment growth, with Melbourne`s apartment prices up 5 percent over the past five years and Sydney`s 40 percent. There is an oversupply of new apartments in Melbourne, Victoria`s capital, and more than 14000 apartments will be built over the next two years.
Assuming the Melbourne buyer borrowed 95% of the house price, they had 5% of the capital. A 13 per cent price call would cause them to enter the negative asset, and the sydney apartment would have to drop by 25 per cent to enter the negative asset.
Another risk is that nearly 2/3 of Melbourne`s apartment owners (central business district, DOcklands and Southbank) are riskier investment loans and interest-only loans. This is the highest of all high-density areas.
"Melbourne`s inner city lenders have the least capital to resist losses, in part because of lower apartment price increases." Moody`s analyst Natsumi Matsuda said.
"in the inner city of Melbourne, the largest number of new apartments should be built in the next two years, with an average additional capital of 7.6 percent. Melbourne also has two regions, Yarra and Port Philip, with 7 percent and 7.4 percent, respectively, "Ms. Matsuda said.
Although the latest CoreLogic data show Melbourne apartments have risen 5.2% in the past 12 months, most of the increase comes from older apartments or smaller developments.
In its annual report, insurance company QBE predicted a 9 percent drop in Melbourne apartment prices from 2016 to 2019, a 6.8 percent drop in Sydney and an 8.2 percent drop in Brisbane.
"the record number of apartments built and the large number of apartments under construction will affect the median price of Melbourne apartments," said Phil White, chief executive of QBE`s Lending Insurance division.
Data released earlier this year by valuation firm WBP showed that the pre-sale valuation of the Melbourne central development was 11 percent lower than the contract price.
In addition, a study by the Australian Journal of Finance and Economics found that 24 percent of Melbourne apartments sold at lower prices than they were when they were bought on a flat basis.
Many Melbourne investors face a dangerous situation-the oversupply of apartments has intensified, banks have reduced lending to buyers of high-rise apartments, and non-banks and overseas institutions have tried to fill the gap with much higher interest rates.
While the default rate is still at a low 5%, more and more overseas buyers are struggling to find funds to complete their apartment contracts.
