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Warning to property sector of rising defaults

Warning to property sector of rising defaults

Builders, contractors and suppliers are being warned to expect a rise in defaults in the property sector, as “poor risk management” bites hard amid falling house prices and an apartment oversupply.

Analysis by RiskWise Property Research singled out Brisbane as the chief concern, suggesting that an oversupply of apartments in the Queensland capital will trigger a flow-on effect on business default rates.

It claimed that valuers in Brisbane have been heavily criticised for not spending adequate time on the valuations of each new apartment being constructed, but said valuers were not the problem.

“The issue of oversupply is not a new problem and has been there for a few years, and the continuous weakness of the unit market in inner-city Brisbane should have raised red flags for developers and lenders,” said RiskWise CEO Doron Peleg.

“What we are seeing now is the realisation of the risk that should have been identified at least a couple of years ago.”

The result, Mr Peleg said, is that “defaults have been rising and will continue to do so.”

He blamed a lack of developer foresight in seeing the potential for a unit oversupply, combined with lending restrictions, as the reason apartment prices in the city fell by 2.04 per cent in the year to June 2018, following falls of 1.8 and 2.2 per cent in the two years prior.

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“It seems there was no methodological and structured risk-management approach including identification, assessment and mitigating action plans to address those risks. Overall, it seems they were too optimistic about the projected market value, and it is highly likely that the price they paid for the land was also too high,” said Mr Peleg.

“The point is that if developers and lenders put more proper risk-management practices in place, this could all be avoided.”

However, Brisbane is not the only city to see property price falls in 2018, with broad implications for the sector, as well as those businesses directly reliant on it.

Property data company CoreLogic’s Quarterly Auction Market Review showed a 6.8 per cent fall in auction clearance rates across the capital cities – led by sharp falls in the once-booming Sydney and Melbourne markets.

Tasmania was the only region to buck the trend.

More broadly, personal insolvency rates have also risen for three years in a row.

Warning to property sector of rising defaults
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