Tougher lending regulations may mean that one-in-three off-the-plan investors could face financial stress completing purchase of their properties.
Peter Ristevski, a partner with Chan & Naylor, warns that because of tough new lending rules, many property investors are considering forfeiting deposits rather than having to take out additional loans or find more funds to bridge gaps up to 20 per cent of the property value.
He was reported in the Australian Financial Review as saying:
“I fear a flood of investment properties coming back onto the market will drive down prices and force a correction.”
If he’s right, and I think he is, this could cause a flood of new apartments coming back onto the market, meaning that those who are able to settle may still find themselves in a heap of trouble as they’re likely get stuck with negative equity.
You see a glut of properties is likely to hit the market as some investors scramble to sell their properties at the same time as the developer will have to try and resell this stock and this of course is likely to make the value of similar properties plummet and drag down the value of those investors who had the financial discipline to settle.
A ticking time bomb
Ristevski is just repeating warnings I first made a number of months ago when I suggested that there is a ticking time bomb waiting for many property investors.
I 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.
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.
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 months the banks have tightened their lending criteria on the insistence of APRA (The Australian Prudential Regulation Authority) and many will have to come up with a twenty percent deposit.
And it’s even worse for SMSF’s
Things are even worse for self managed super fund investors that have to find up to 30 per cent and are also ineligible for mortgage insurance because the loans are limited recourse.
Plus the new requirements mean these investors need to leave additional funds in their SMSF for contingencies and therefore can’t use all the money in their SMSF for their deposit.
Industry estimates suggest there are 90,000 apartments being constructed around the country that have been sold off-the-plan but are not yet settled.
The buyers of about 20 per cent of these, or 18,000, have paid a deposit of just 10 per cent of the full purchase price, according to analysis of statistics from RP Data Core Logic.
I’d be staying well clear of the inner CBD apartment market and surrounding suburbs as this is where much of the fallout will occur.