Credit ratings agency Standard & Poor’s highlighted concerns regarding apartment construction boom in Melbourne and Brisbane and how it can affect inner-city prices and settlement risks caused by tougher bank lending rules. However, S&P said that it did not expect an increase in home loan defaults.

“There is growing concern over the large volume of new unit stock coming onto the market, in addition to the already-existing supply, particularly in inner-city postcodes. This is more pronounced in Melbourne and Brisbane,” the S&P report said.

According to Reserve Bank figures, there is a slowdown in housing credit growth in the year to April due to weaker growth in investor lending. Tighter property lending regulations have required bigger deposits from investors, raising settlement risks, especially for off-the-plan buyers.

“This is of particular concern for off-the-plan developments, which have a lag between the contract being signed and final settlement,” S&P said. “Property prices could be affected, particularly if new units coming up for settlement are in competition with existing supply.”

Although the Reserve Bank said that there was potential for banks to make large losses from soured loans to property developers due to looming apartment glut, the latest round of financial results showed low levels of mortgage stress.

S&P’s report also said that the proportion of mortgage borrowers behind on their repayments has drifted higher for the past five months, especially in mining states like Western Australia and Queensland. But since the jobs market in these areas was “relatively stable,” the credit ratings agency does not expect higher arrears to translate to a mortgage default rise.