Australia’s apartment building boom poses a “moderate risk” to mortgage-backed securities, Moody’s warns.
The ratings agency says 230,000 new apartments are due to be completed by 2018, according to CoreLogic, which is double the annual average of sales over the five years to April 2016.
Moody's says more than half of those properties will be built in areas that already have a large supply of existing apartments, which will put pressure on prices and rental returns, creating a risk for residential mortgage-backed securities (RMBS).
Falling US property prices in 2007 led to a big devaluation of RMBS, which in turn led to the sub-prime mortgage crisis followed by a banking crises then a recession.
Moody's analyst Natsumi Matsuda warns the exposure of Australian mortgage bonds to apartments in high-density areas was increasingly risky.
"Such a development will in turn raise the risk for residential mortgage-backed securities (RMBS) exposed to these 'high-density regions', but for Moody's-rated RMBS portfolio overall, the rise in risk will be moderate," Ms Matsuda said in a statement.
"Specifically, with the Australian RMBS that we rate, there is a moderate overall exposure of 5.6 per cent to mortgages on apartments in high-density regions."
Moody's said inner Melbourne apartment home loans were the biggest risk because due to sluggish price growth of just five per cent, compared to 40 per cent in Sydney, over the last five years mortgagees there had least additional equity for absorbing losses.
The ratings agency said a high proportion of apartment mortgages is high-density areas were also investment or interest-only mortgages, which were riskier than owner-occupier and principle and interest mortgages, because borrowers typically repaid the former home loans slower.
The ratings agency said the large supply of new apartments would put downward pressure on apartment rents and drive up vacancy rates, also lowering the return for investors who relied on rent to repay their mortgages.
"Rental yields on apartments in Sydney and Melbourne are already at the lowest levels in a decade," Moody's added.
"Such developments will in turn pressure mortgage performance."