Apartment prices in Australia’s CBDs have fallen by an average of 6.3% in the 12 months to July, according to CoreLogic.

Every capital city CBD posted a decline in growth, but where the biggest declines are coming from is even more telling; it is being driven by the country’s two highest performing capital cities—Sydney and Melbourne.

Sydney’s CBD apartment prices fell 9.1% over the 12-month period, while Melbourne’s CBD apartment prices fell 8.4% over the same period.

Lacklustre demand is partially responsible for these price declines. According to an article that was published in The Australian last Wednesday, a one-bedroom apartment in Melbourne’s CBD recently came to the market for $161,000. The general asking price for such an apartment is at least $550,000.    

“Clearly, one seller was sick of the fact that their apartment was not selling and simply put it on the market for sale to the highest bidder,” the article noted. 

With so many apartment developments coming into the market, there are fears of a looming apartment glut. These fears are amplified by the fact that Chinese investors are largely the buyers of these new apartment developments. Current regulation states that offshore buyers can only purchase new real estate. This has created a huge “secondary apartment market” where units sell for far below the values investors are paying for off the plan.

“In the next six months many tens of thousands of apartments in Melbourne and around Australia that have been bought off the plan by Chinese and other Asian investors will come up for settlement,” the article stated.

Nerida Conisbee, chief economist at REA Group, called the pace of development in some capital cities “eye watering”. According to REA Group, there are over 18,000 apartments under construction in Melbourne alone. These apartments are scheduled for completion within the next 18 months. Historically, the Melbourne CBD has added 1500 apartments every 18 months for more than a decade.

While falling apartment prices in the CBD spells good news for first-home buyers and those who’re worried about affordability, it isn’t as fortuitous for the economy.

According to Conisbee, one of the risks facing the slumping CBD apartment market is settlement risk. This occurs when buyers put down deposits for off-the-plan apartments, but when the developments are completed, the banks won’t fund the loans because the value of the apartments have fallen, which causes buyers to default.

Banks view real estate as risky investments when prices drop. “Banks are now being restricted on the amount that they are lending, particularly to investors,” Conisbee said. “They are being capped on the growth in their lending so they may see that particular apartment development as not being worthy of their lending. People have put down deposits two years ago...but the banks can change their approach to risk quite significantly.”