Ticking Time Bomb for Property Investors

Thousands of investors face financial ruin because they won’t be able to settle the “off the plan” apartments they signed up to buy.

You see… industry insiders are worrying about a ticking time bomb, that the average property punter is not aware.

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 suddenly tightened their lending criteria on the insistence of APRA (The Australian Prudential Regulation Authority.)

A gamble that can cost a fortune

Buying off-the -plan is a gamble on how the market will perform.

Buyers decide to purchase a property often before construction has commenced.house plan apartment

They exchange legally binding contracts agreeing to purchase the property at a set price when it is finished, gambling that the value of the property will rise over the 2 years or so until completion.

Buyers typically put down a 10% to 20% deposit but do not secure a mortgage until a few months before completion.

If they can’t find the money to complete they are in default on their contract, forfeit their deposit and face being sued for damages.

These damages can total the difference between the reduced price the developer finally achieves for the property and the original agreed price.

Their problems will be compounded by the fact that many will have paid above-market prices thanks to incentives offered by the developers and they will find they have a bigger shortfall than they anticipated on completion.

How big is the problem?

The Australian Financial Review reports that there are 90,000 apartments being constructed in Australia that have been sold off-the-plan but not yet settled. Plan-keys

The purchasers 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 CoreLogic RP Data.

However finance has now become both more expensive and harder to secure, with many lenders increasing their interest rates for investors and at the same time requiring a minimum 20% deposit funded by the purchaser.

This means many of these investors could struggle to find finance for the remaining 90 per cent purchase price as banks are suddenly toughening up lending criteria for investors.

And it may be even worse for those who planned to buy in their Self Managed Super Fund, as some banks are now requiring an even bigger deposit for this type of purchase.

And it gets worse

Many off the plan purchasers were foreign residents hoping to secure a loan in Australia for their property.

And many didn’t even have a deposit saved up – they borrowed for their deposit back home.

Now China is making it hard for it’s nationals to take money out of the country, Asian banks are reluctant to lend for Australian property purchases and local banks have all but stopped lending to foreign residents.

Yes …it’s a ticking time bomb waiting to explode!

It won’t be rosy for those that settle.

And those able to settle may still find themselves in a heap of trouble as they’re likely get stuck with negative equity.

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.

This is of course likely to make the value of similar properties plummet and drag down the value of those investors who had the financial discipline to settle.

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.

How to avoid the ‘time bomb’

If you’re looking for independent advice, no one can help you quite like the independent property investment strategists at Metropole.

Remember the multi award winning team of property investment strategists at Metropole have no properties to sell, so their advice is unbiased.

Whether you are a beginner or a seasoned property investor, we would love to help you formulate an investment strategy or do a review of your existing portfolio, and help you take your property investment to the next level.

Please click here to organise a time for a chat. Or call us on 1300 20 30 30.

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Also published on Medium.

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Michael is a director of Metropole Property Strategists who create wealth for their clients through independent, unbiased property advice and advocacy. He's been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au

'Ticking Time Bomb for Property Investors' have 31 comments

  1. July 30, 2015 @ 6:28 pm Tim

    Another great article Michael – there’s going to be some blood on the streets.
    I know a few people who bought off the plan properties in their SMSF, having gone to spruikers – boy are they stuffed


  2. July 30, 2015 @ 6:30 pm Ainslee

    that could be a big problem for many off the plan buyers – but how will it affect surrounding suburbs?


  3. July 31, 2015 @ 7:13 am CanberraInvestor

    I have been through this a couple of years ago and it is very scary to face the possibility of defaulting. My mistake is a warning for others about researchign properly before signing up. I purchased a Melbourne CBD (bad decision and boy have I learned a lesson) – not only was the value under purchase price, but it was classified as a small apartment as the valuer used the inside skirting rule to measure instead of middle of the walls (even though I am still responsible to middle of the walls if anything happens) taking it below 50m2. this meant that my lenders would only lend to 60 or 80% of assessed value. so not only did I have to fund the shortfall between purchase and value, I also had to find another 20% for what they wouldn’t lend to. I managed to make it work so at least I have a reasonable cash flow property, but am behind in the capital gains. given the way lending practices are now, I am sure it will be even worse.


    • July 31, 2015 @ 7:35 am Michael Yardney

      Thanks for your warnings – yes some off the plan investors will learn some very difficult lessons over the next few years


  4. July 31, 2015 @ 7:47 am Scott


    I thought Australian real estate never goes down? borrowing against equity…. SMSF to buy property…..Cheap credit…

    About time they put the leash on all this speculative “investors” and give the people looking for a place to live and raise a family a go.

    The state of the rentals these days is 95% of the time disgusting, without the “landlords” even bothering to clean the joint… Try asking them to fix anything! Very lucky if you get a decent one who will look after the tenants and asset.

    Sitting on the sidelines with money in the bank until it all comes unstuck and these over leveraged “investors” realize they were sold lemons…very expensive ones.




    • July 31, 2015 @ 8:00 am Michael Yardney

      You’re right Scott – it is a myth that property prices never go down – they do cyclically.
      But the price of well located capital city properties never “crash” – at least they haven’t since the 1890’s.
      I wouldn’t be buying these high rise apartments even when their values do plummet


      • July 31, 2015 @ 1:38 pm Macy

        I don’t think so. Heaps of people talking about the crash for a long time and it didn’t happen. One major factor you are forgetting is there is heaps, I means HEAPS of overseas Chinese money coming in to buy these off the plan units. They don’t rely on local finance to buy so valuation does not stack up doesn’t worry them. If the price does not rise up they simply hang on to it. When they compare properties here to their local countries, it has CHEAP AND STEADY ALL OVER THEM. There won’t be a crash, those did not buy today, will again, like few years ago, miss out again.


        • July 31, 2015 @ 2:46 pm Michael Yardney

          You’re right – the overseas buyers tned to put down bigger deposits and have different sources of finance. It’s the local specualtors who’ll get caught out.

          By the way..I’m not predicting a crash


        • July 31, 2015 @ 3:49 pm scott

          I guess we will see Macy. Once in a century commodities boom kept us afloat during the GFC. Hows it going now. Business confidence and investment flatlining….

          More job cuts each week. Lots of infrastructure projects scrapped…

          Shanghai stock market chaos..tightening regulations on investmentors, both foreign and local, possible o er supply on its way. FED to raise rates in the US…

          Median house price e 1M…aging population.

          Is your wage keeping up with housing increases?

          Good if you own some and not leveraged to the eye balls


          • October 19, 2016 @ 9:33 pm Lee

            I agree Scott. Asian countries at least have a manufacturing base. Most Sydney people who are late into the real estate market are just thinking that their rental house/apartment is a way of becoming rich. Whatever happened to actually making something and then selling it.

    • July 31, 2015 @ 3:34 pm George

      Scott. You are exactly the type of investor that MY is referring to.


  5. July 31, 2015 @ 3:32 pm George

    Same old thing every property boom. M.Y. is not predicting anything new here. Like me he has been around for a long time and so has seen this happen almost every property boom. I wouldnt place my bets on the Chinese holding up the off-the plan market either. With our dollar crumbling so is the value of their investment. That alone could cause a panic sell-off at any time. If they have a financial crisis in China then watch them all sell up at the same time. So foreign investors dumping thier property stock wont be pretty either. That is another major risk nobody has even mentioned. Its no wonder the RBA, APRA and the major banks are starting to take pre-emptive precautions. The writing is certainly on the wall if anyone chooses to read it. Anyway MY, shrewd investors will sell-on their off-the-plan purchase to some other late to the party speculator. There is no need to wait till completion to sell your off-the-plan investment. It doesnt take much to double your deposit on these.


  6. July 31, 2015 @ 5:24 pm JT

    So do we laugh or cry if apra themselves bring about a crash they think they are preventing thanks to their actions.


  7. July 31, 2015 @ 10:49 pm Danny

    This change in investor lending rules has been taken advantage of by the banks, and in the renegotiation of my investment loans I am hearing from my bank that they are “obliged” to raise interest rates for investors.I think they are just trying to make more money. Along with this I have found that I cannot use the equity I hold in my properties for construction of homes unless I can afford to pay principal and interest on the loan!! A few weeks ago I could’ve accessed the equity easily, interest only…no questions asked.


    • July 31, 2015 @ 11:11 pm Michael Yardney

      Yes Danny – you can see why I’m a little concerned


    • August 1, 2015 @ 5:47 pm Scott

      I feel for you Danny. I really do…. must be tough that you now need to service a loan like an OO.

      Great news for us people trying to find an affordable and stable place to live.

      Maybe soon prices will come down to a more reasonable level.



      • August 2, 2015 @ 4:26 pm Danny

        Thanks for our concern Scott! But like most former OOs.. I’ll get around it :) I have to, there is a need for more stock so we need more construction here :)


        • August 3, 2015 @ 8:10 am Scott

          Good luck Danny. Yeah more “stock” needed.

          I hear there is plenty on the way. A “glut” some may say, great for your supply and demand

          I hope your as upbeat when it falls over and your “stock” is worth less than you paid for it, or it is returning SFA from the lowered rent due to oversupply and increased competition.

          Enjoy your day champ.


          • August 3, 2015 @ 11:42 am Danny

            It’s good to be positive Scott. Just buy carefully in good areas that people want to live in, aim for growth in the long term, and not rental return, look after your valuable tenants and you won’t fail. It’s along term investment. I’ve been investing for almost 30 years in property and I’ve never looked back. It’s not a place for those who want to make a quick killing. Property cycles come and go, you balance the good and the bad times. There will always be doomsayers, but in the long run, I’ll succeed … But thanks for your concern. Have a good week Scott!

          • August 3, 2015 @ 2:12 pm Scott

            Seems the type of values you have as an investor are few and far between in this day and age. The “new” landlord, couldn’t care less about the tenant or even upkeep and presentation of the asset.

            I think that can’t loose mentality could be Australia’s Achilles heel to an extent, the younger breed of “investor” might not be so lucky as the boomers. Time will tell I guess.

            The world is changing.

  8. August 2, 2015 @ 8:24 am Rod

    Just a note for your keen followers. As a broker I can say that banks are tightening up on lending LVR’s( Loan to value ratios) but can still lend at 90% including mortgage insurance at the moment. Without doubt some lenders will further retract and some will remove themselves from investor lending full stop as AMP have done last week. Tip to buyers off the plan is to get saving really hard to bridge the gap therefore minimizing the impact.


  9. August 7, 2015 @ 2:39 pm [email protected]

    Great debate folks, hey Scott you may consider investing resi Adelaide..say 4-5km form the cbd Ovingham – Prosopect area, much cheaper than the eastern states. large blocks, certainly gentrification, hold for a decade then become the developer. Keep renting where you are. Theres your super all sorted. Remember, stats are across the board. there is a good 15% plus growth in certain loacations..even in Adelaide. Stay cool mate!


  10. June 17, 2016 @ 10:50 am George

    OK Time for an update on this previously published article. Been here, done that. The simple way around this is to tell the bank you are taking out a home loan and not an investment loan. They wont hesitate to do this as they want the business too.


    • June 17, 2016 @ 11:54 am Michael Yardney

      Thank you for reding my material so carefully that you realise when i republish an article – with thousands of new readers every month, I tend to republish articles for their benefit.

      By the way – what you recommend is credit FRAUD – you new apartment won’t look good form a prison cell


  11. June 17, 2016 @ 3:17 pm Raj

    Hi Michael,
    What do you think of the apartment market in the middle suburbs like Malvern East and Caulfield


    • June 17, 2016 @ 8:58 pm Michael Yardney


      In general these are good suburbs – but steer clear of new and off the plan projects there – there’s a huge oversupply looming in Caulfield in particular


  12. June 17, 2016 @ 4:11 pm NOEL

    In my view Mid North Coast is a great place to invest in units. I did my research 6 years ago and bought 3 units, great returns of 5% and never short of tenants.

    I’ve just sold one of them and enjoyed almost a 50% capital gain over 2 and a half years.

    My point is there is no need to stick to capital cities whereby you’ll do much better elsewhere wih minimal risk.

    Why buy 1 property when you can have 3 for the price of one i rest my case.


    • June 17, 2016 @ 8:59 pm Michael Yardney

      I’m glad your investments performed well Noel. Why would you seel it if the unit grew so well?


      • June 20, 2016 @ 11:41 am NOEL

        i’m going to top up my super portfolio, so as to have a good balance of property and super better tax effective specially nearing retirement age.which ever way i see it love property, but too many expenses per say however, my remaining bricks and mortar are for long term as it should be viewed i have set up line of credit for cash flow.

        Super is a diverse investment Michael and can be fruitfull wether be a TTR which i have or set up SMSF which i’m considering.


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