Property developers may pose risk to Australian financial system: central bank

A cooling housing market and increased supply of apartments risks Australia's financial stability, though the system overall is in good shape, Australia's central bank said on Friday.

In it's twice-yearly report into both domestic and foreign risks to Australia's banking sector, the Reserve Bank of Australia (RBA) said the possibility of large losses on lending to property developers and the commercial property market are a risk to finance.

"In addition, banks' resource-related exposures have shown further signs of stress, but...these represent only a small share of their total exposures," the RBA said.

Aussie banks have recently been heavily sold on fears syndicated loans into the resources industry are coming under duress. Australia's big-four banks have a over one billion Australian dollars (over 769.68 million U.S. dollars) in unsecured loans owed by local steel maker Arrium Ltd that was placed into voluntary administration last week.

Slowdowns in regional economies are also a potential risks to the property market, given apartment complexes being completed by property developers are popular with investors and foreign buyers.

"Any concerns over settlement risk and/or a slowdown in demand for Australian-located property by Chinese and other Asian residents could lead to difficulties for particular projects, though there is little evidence of either occurring so far," the RBA said.

Adding to concern, the looming supply glut of apartments due to be completed in the growing capital cities within the next few years will screw the supply/demand balance.

"This new supply may weigh on prices and rents in these areas," the Reserve Bank of Australia said.

"If that occurs, investors will need to service their mortgages while earning lower rental income and any households facing difficulties may not be able to resolve their situation easily by selling the property."

The bank however was quick to point out the offshore and domestic risks did not appear to seriously weigh on the financial system's functioning on their own, though could be aggravated should a global shock in the current low-growth environment spill into Australia.

The central bank's warning comes as shares in Australian listed real estate agents McGrath Ltd were placed in a trading halt on Friday to review its prospectus forecasts.

McGrath floated on the Australian Securities Exchange (ASX) for 2.10 Australian dollars (1.62 U.S. dollars), but has lost almost half of its value on earnings fears as the local housing market slows from its recent boom.

McGrath's shares closed at 1.30 Australian dollars (1.00 U.S. dollar) on Thursday. Endit