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.
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.
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’
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Also published on Medium.