Off-the-plan apartment crisis in Australia: Why buyers are struggling to settle

Key takeaways

The off-the-plan apartment market in Australia is facing a crisis, as buyers struggle to pass the bank's serviceability test due to rising interest rates and lower borrowing capacity.

If buyers cannot settle their purchases, it could lead to developers needing to find new buyers for the property, exacerbating the rental crisis in a market that already has record-low vacancy rates.

Buying established apartments using a strategic approach that focuses on appealing to owner-occupiers, buying below intrinsic value, and choosing areas with a history of strong capital growth, properties with a substantial land-to-asset ratio, and properties with unique features can help minimise risks and maximise upside.

The off-the-plan apartment market in Australia is facing a crisis, as a growing number of buyers who purchased a residential property via off-the-plan contracts are seeking to on-sell prior to settlement.

Rising interest rates are making it difficult for buyers to pass the bank’s serviceability test, and some buyers who might have cleared their bank’s serviceability requirements 12 months ago struggle to pass this same test today.

Add to this the fact that if the bank valuation comes in significantly below the contracted purchase price, buyers may need to make up the difference or take out a mortgage with a much higher loan-to-value ratio, which could trigger higher rates and a requirement to pay lenders mortgage insurance.

Some borrowers could even find themselves in negative equity before they’ve even stepped foot on their property, making it all but impossible to find finance at all, unless they can find extra cash elsewhere.

Of course, some buyers may not be able to settle their purchases as their borrowing capacity has shrunk by around one-third since the RBA began lifting interest rates, and as a result, buyers that committed to an off-the-plan purchase a year ago could see their loan applications knocked back at settlement, leading to many off-the-plan buyers losing their deposit.

This could lead to developers needing to find a new buyer for the property, which could be challenging if the nomination contract isn’t competitive in the resale market.

This will only exacerbate the rental crisis

The slump in the off-the-plan market is concerning given rental vacancy rates are already at record lows and rents are soaring at double-digit rates.

With record immigration now arriving in Australia, the nation needs more housing supply than ever, not less.

The outlook for the off-the-plan apartment market is bleak, with dwelling values falling amid rising interest rates, and banks being more conservative with their valuations.

It’s no secret that I’m not a fan of buying off-the-plan apartments

For many, many years, I’ve talked openly (and written extensively) about what I believe to be the high risks associated with buying off-the-plan properties, from an investment point of view.

There are a number of reasons why these types of properties represent a riskier proposition from an investment perspective – including a lack of scarcity factor, building quality issues, a lack of demand from owner-occupiers, a very low land-to-asset ratio and mountain expenses when it comes to ongoing costs and maintenance.

One thing that they often don’t lack is a profit margin for developers.

There are many reports showing buyers of new and off-the-plan properties see little or no capital growth for up to a decade after they purchase their property because they paid too much in the first place.

What’s the alternative to buying off the plan?

I prefer buying established apartments and to ensure I buy a property that will outperform the market averages I use a Strategic Approach.

I buy:

1. A property that will appeal to owner-occupiers (because they’re the ones that push up property values.)
2. Below its intrinsic value – that’s why I avoid new and off-the-plan properties, which come at a premium price.
3. In an area that has a long history of strong capital growth, and which will continue to outperform the averages. This is often a gentrifying suburb
4. I only buy properties with a substantial land-to-asset ratio.
5. I look for a property with a twist – something unique, special, different or scarce about the property, and finally…
6. A property where I can manufacture capital growth through refurbishment, renovations or redevelopment.

By using a strategic approach I minimise my risks and maximise my upside.

Each strand represents a way of making money from property and combining all five is a powerful way of putting the odds in my favour.

If one strand lets me down, I have three or four others supporting my property’s performance.

About Michael Yardney Michael is the founder of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and one of Australia's 50 most influential Thought Leaders. His opinions are regularly featured in the media.