Recently released figures show how most investors who bought off the plan in Melbourne, the second strongest property market in Australia over the last few years, have lost out.
According to the Australian Financial Review, a study of nearly 2000 off-the-plan properties in Melbourne valued by WBP Property Group between 2014 and 2015 found that half are now worth less than their original purchase price.
Most of the properties studied were purchased between late 2009 to late 2015, and the study found the average loss was about $40,000, or around 10% of their original purchase cost.
Only 1% of properties surveyed were found to be worth more than their original purchase price, with the remaining 49% now valued at the same price they were originally purchased for.
But there’s more…
Many investors buy off the plan on the promise that they’re buying at “today’s price” and that the value of their apartment will increase before completion meaning they’ll profit along the way.
Many hope they won’t even need to tip in any extra equity on completion.
Of course this sounds great, but so does Santa Claus.
Those who bought off the plan lost out even more if you take into account:
- The opportunity cost – if they put there money into established apartments they would have likely performed much better.
- The after inflation “real” cost – which means that if you factor in inflation an even greater proportion of investors have likely lost money.
Even more pain to come:
I recently wrote that industry insiders are worrying about a ticking time bomb for property investors who bought off the plan.
I explained that thousands of investors could 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.)
The bottom line..
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.