Australia's central bank said easy monetary policy globally is spurring demand for the nation's office buildings, even as vacancies climb and rents fall, raising risks of a future price slump.
"Prices have continued to rise at a national level, driven in particular by investors' search for yield in the global environment of low interest rates and ample liquidity, with the lower Australian dollar also likely to be adding some impetus to foreign demand," the central bank said Wednesday in Sydney. "The risk of a large repricing and associated market dislocation in the commercial property sector has increased."
The competition for assets and a re-assessment of return expectations for prime real estate has resulted in lower yields across a number of major office markets, according to research from JLL. In Sydney and Melbourne, yields for some of these properties have fallen below 6pc for the first time since 2008.
"The total value of office, industrial and retail property transactions has risen sharply recently, with a notable increase in the share of transactions involving foreign purchasers, particularly in Sydney," the Reserve Bank of Australia said in its semi-annual financial stability review.
About 25 central banks from Uzbekistan and China to the euro-area and India have eased monetary policy this year either by cutting benchmark rates, charging banks more to hold deposits or making it easier for them to lend, tweaking currency bands or announcing bond-buying programs. Many of the shifts, including ones by Canada, India and Australia, were a surprise.
"RBA concerns about the commercial property market reflect the growing disconnect between prices and fundamentals," said Michael Blythe, chief economist in Sydney at Commonwealth Bank of Australia.
"The general property story is essentially part of the global search for yield. The conditions driving this search are likely to be the main area of RBA concern," he added.
Governor Glenn Stevens and the central bank board have lowered borrowing costs by 2.5pc since late 2011 to 2.25pc in February as they try to boost industries like construction as mining investment ebbs. In the housing market, the associated fall in mortgage rates has spurred a 35pc jump in Sydney house prices from a 2012 trough that is an increasing risk to economic stability.
"Ongoing strong speculative demand would tend to amplify the run-up in housing prices and increase the risk that prices in at least some regions might fall significantly later on," the RBA said, referring to the high proportion of property investors in the market. "Indicators of household stress are currently at low levels, but could start to increase if labour market conditions weaken further than currently envisaged."
Australia's labour market has been weakening. The RBA noted the risk of oversupply in housing is most evident in inner-city Melbourne, where apartment construction has been high for years and the rental market "looks fairly soft." (Bloomberg)