Off the plan property purchasers may have to pay a bigger deposit plus payments during construction if one of our big banks gets its way.
The fact that most buyers only put down a 10% deposit with the remaining 90% on practical completion of the development is a concern according to ANZ Bank’s submission to a federal parliamentary inquiry into home ownership.
ANZ deputy CEO Graham Hodges said there was a reasonably substantial risk that conditions could change during the approximately four-year period and the value of an apartment purchased off the plan today could be worth 10-20 per cent less.
ANZ says the 10 per cent deposit has proven to be an inadequate pre-estimate of the loss a developer suffers if a buyer does not complete a contract, and banks therefore require high levels of equity from developers to finance apartments given the pre-sale settlement default risk.
Increasing the deposit and requiring progress payments would reduce the risk for developers and increase the likelihood that projects go ahead, ANZ argues.
“To ensure the sustainability of the supply chain, and to protect the industry against a downturn in Melbourne or Sydney, consumers should carry more of the risk,” ANZ’s submission said. “This is likely to lead to increased funding availability, reduced funding costs and earlier funding of projects.”
A Ticking Time Bomb
Michael Yardney recently wrote that industry insiders are worrying about a ticking time bomb for property investors who bought off the plan.
He said that thousands of investors face financial ruin because they won’t be able to settle the “off the plan” apartments they signed up to buy.
The problem is that off the plan property buyers generally can’t obtain pre-approvals to finance their purchase, as these are only valid for 90 days.
This means many put down a 10 per cent deposit intending to finance the remaining 90 per cent of purchase price on settlement.
Of course only a few months ago this would have been easy with the banks falling over themselves to lend money to investors.
However, many of these buyers will not be able to obtain finance to complete their purchase because over the last few weeks the banks have suddenly tightened their lending criteria on the insistence of APRA (The Australian Prudential Regulation Authority.)
As if those who recently bought off the plan apartments didn’t already have enough to worry about, with a looming oversupply of new apartments and poor on completion valuations; now tough lending criteria could mean many won’t be able to settle their property purchases.