Apartment prices could slide 10-15 percent: economist Stephen Walters

Economist Stephen Walters forecasts apartment prices are likely to fall 10 percent to 15 percent over the next one to two years.

"I think it's going to get ugly, particularly in some parts of the market and for some lower-income cohorts who have borrowed," Walters told the Australian Financial Review. 

He also thinks the contagion could spread to the major property market

The comments comes amid concerns expressed by the RBA recently, as latest as Tuesday, that a "considerable supply" of units would arrive over the next few years, adding to the need to closely watch the property market. 

Property Observer earlier reported about the central bank’s estimate that 16,000 new apartments in Melbourne over the next two years would add around 18 per cent to the city’s stock of inner-city housing, while an additional 12,000 in Brisbane would add 15 per cent to existing stock levels.

The RBA noted apartment ­prices and rents were weaker in Melbourne and Brisbane, while vacancies were higher.

Falling rents are a “strong signal” of downward pressure on the market, said Walters,  who is chief economist ‎at the Australian Institute of Company Directors.

"Rents are already off and given that a large part of the market is investor focused, that's got to affect your price expectations and purchasing prices," he said.

The AFR article said that the RBA sparked the apartment construction boom through interest-rate easing to stimulate growth to counter the end of the resources boom.

Walters said while he supports the rate cuts to date, this year's two reductions have added fire to an already hot market.

"They knew this would happen. They engineered this part of the boom. When interest rates go down, housing will pop.

"And they've had to keep cutting through gritted teeth because they're making the adjustment and shakeout in housing and balance sheets that much worse."

The RBA said in its Financial Stability Review that any collapse in the apartment market would almost certainly flow to the broader market.

“If apartment markets were to turn down and settlement difficulties become more widespread, banks would be more likely to incur some loan losses,” the ­bank said.

"If you get a real shakeout in inner Brisbane and Melbourne, where rents are already falling, eventually that will have to be reflected in not just the apartment market but in the broader market,” said Walters.

Even though the RBA doesn't regard a potential collapse in apartment prices as "systemic risk" to the financial system, banks will be impacted as they have let to both buyers and developers.