"Settlement failures might increase" on residential developments flourishing in Australia's cities, the Reserve Bank of Australia cautioned in its half-yearly Financial Stability Review on Friday.The RBA wrote: "An ongoing risk comes from the significant and geographically concentrated growth in supply of new apartments in Sydney, Melbourne and Brisbane due for completion over the next few years. "This new supply may weigh on prices and rents in these areas. "If that occurs, investors will need to service their mortgages while earning lower rental income and any households facing difficulties making repayments may not be able to resolve their situation easily by selling the property."The RBA did not add any comment on the excited analysis pervasive in public commentary on the Labor opposition's housing affordability policy. This theorises a collapse in property values in residential sectors popular with private investors, such as flats.Labor Party policy will remove negative gearing from purchases of established dwellings while grandfathering it for existing dwellings. Labor will also continue negative gearing for new construction and policy that may serve to extend the glut in new flats, if one exists. The RBA said the risk of an increase in settlement failures was "one reason why it remains important to have prudent lending standards ahead [of the] possibility [of any fall in the price of flats]."For the developers of these apartments, risks appear to have increased since the previous Review."The RBA emphasised that "demand for apartments [is] softening in some areas, particularly in Brisbane and Perth, and households [are] facing tighter access to credit."The Review explained that "industry liaison suggests that developers in Brisbane are having increasing difficulty securing pre-sales, leading to wider use of rental guarantees and other buyer incentives, project delays and, in some cases, sales of development sites. "Conditions in Perth have also deteriorated, as the new supply of apartments is being sold into a weaker local economy."Both cities, and especially Perth, are most exposed to the adverse consequences of the unwinding of the mining boom."The vacancy rate is climbing sharply in Perth, reaching almost one-quarter of properties, and remains high in Brisbane, and rents are falling," the RBA observed.The Review all but forecast "a downturn in apartment markets" and said this "could weigh on developers' financial health through a number of channels. "Values of sites and incomplete developments would be likely to fall the most, and the value of apartments held on developers' books would also decline."The residential investment preference of private investors from Asia (mainly China) may not stem the weakness in Perth or Brisbane, but the RBA sees these foreign capital flows as a continuing pillar of property prices elsewhere."Conditions in the Sydney and Melbourne office markets are much firmer and have improved over the past year, reflecting the stronger economic conditions in these cities," the RBA said in the FSR."Vacancy rates have declined and rents have risen as tenant demand for space has increased strongly, both within and outside the CBD areas. "The office markets in Sydney and, to a lesser extent,