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Apartments Micro Sized but Major Risks - featured image
By Doron Peleg

Apartments Micro Sized but Major Risks

Micro seems to be the latest buzzword when it comes to property.

But do big things really come in small packages?

While micro-apartments aren’t a new concept, as housing in major city hubs becomes out of reach for many first apartmenthome buyers, they are an alternative to getting a foot on the first rung of the property ladder.

However, the latest analysis by shows there are dangers associated with purchasing these tiny dwellings for a number of reasons.

Many banks had policies in place restricting lending to dwellings under 50sq m.

For micro apartments, he said it was unlikely borrowing capacity would be more than 80 per cent, based on the loan-to-value ratio (LVR) with some lenders requiring a much higher deposit than the standard 20 per cent.

It comes down to resale and if there is an issue of oversupply as well, which is often the case in these areas, then the lenders are very reluctant to proceed.

These properties experience very little demand from owner-occupiers, especially as there is a strong preference toward larger units. 

In addition, many of these properties are bought off-the-plan and when investors try to resell they can be in for a nasty shock when they realise there is very little demand.

He said some lenders were already toughening borrowing terms for higher-density developments, while the Banking Royal Commission is also expected to lead to further lending restrictions being put in place.

This means those who can barely afford micro-apartments would be unlikely to be granted a mortgage if their application was scrutinised, he said, and therefore the overall demand for this type of dwelling could be even lower.

In addition, there are significant and tangible risks associated with buying off-the-plan units.

These dangers include equity risk, cashflow risk and settlement risk.

There is a widespread oversupply issue which is universally acknowledged by banks which have blacklists for postcodes suffering potential unit saturation. Risk 1

Lenders will either require a much higher deposit as security on their loan, or they may turn down a loan application entirely.

Lenders understand that oversupplied suburbs carry greater risk – and those risks are just as real for the investors who buy in those suburbs.

In fact, they are one more risk on top of a number of others inherent in off-the-plan builds.

It is even more risky when it comes to micro-apartments which have no appeal to families who are looking for at least three bedrooms. Off-the-plan

Off-the-plan investors had to obtain finance approval after construction was complete, and if the market had sunk during the build period, they were paying the mortgage on an over-valued property.

Even worse, last year a first home buyer lost a sizeable $41,000 deposit on a St Kilda apartment after the National Australia Bank refused to proceed with the loan because the property was ‘too small’.

Squashed property values and high vacancy rates are hallmarks of the new oversupply issue.

Right now the market is cooler in Sydney and Melbourne and you can see properties that do not tick all the boxes are far more exposed to price reductions.

About Doron Peleg is the CEO/Founder of RiseWise Property Review. He has more than 20 years’ experience in risk management including, Co-Founder of Peleg, Kessel & Co, an assurance and advisory accounting firm & Executive Manager at Westpac Banking Corporation in Sydney.
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