Alarm bells are ringing for those who bought an off the plan apartment a few years ago.
Many investors who bought an apartment off the plan are finding themselves in financial strife as on completion their apartment is now valued considerably below their contract price.
Here’s what the figures could look like:
When you bought the apartment a few years ago when the Melbourne and Sydney property markets were booming you signed a contract for $700,000 and paid the developer a 10% deposit, or $70,000.
You hoped that over the next few years the property market continued to rise and that on completion your property would have been worth more (after all that’s what the property marketer told you) and the bank would lend you 90% of your contract price.
Fast forward to today and on completion, your new apartment is now valued at $660,000.
If you’re lucky your bank will agree to lend you 90% of the property's current value, or $594,000, meaning you’ll have to find an extra $36,000 to pay the developer.
The problem is, currently we have 4 big banks in Australia and they each have a policy restricting their exposure to anyone building; most won’t lend to more than 15% of the properties in a large complex.
This means that if there are 100 apartments in the building and you are the 16th person to approach the bank when the building is completed, they may decline your application and you’ll have to go chasing finance elsewhere.
And if they do lend for your purchase you may find because of the inner city postcode of your new high-rise purchase, they will lend at lower loan to value ratios, often 80%, meaning you need a bigger deposit.
In February this year CoreLogic reported that 45% of new apartments in Sydney that settled had valuations below their off-the-plan purchase price, up from 18% one year ago.
In Melbourne, the figure was even higher at 46%, double the level reported in February 2018.
This means some investors who bought off the plan just won’t able to settle and will need to sell their property at whatever price they can achieve.
Unfortunately, that’s what the banks will value your property at – the current selling price on completion – not what you paid for it.
Combine this with a lower loan to value ratio and you’re likely to need an even bigger deposit than you initially thought.
This scary hypothetical scenario is becoming increasingly common.
What do you do if you’re stuck with an off the plan apartment that has fallen in value?
Finder.com.au suggests the following.
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- Also read:Sydney property market forecast for 2024
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- Also read:This week’s Australian Property Market Update – Latest Data, State by State November 28th, 2023
You should also talk to your conveyancer or solicitor, who would have helped you with the initial contract and likely understands your legal options better than you do.
Talk to them before making any decisions.
Remember if you walk away from your contract you could not only lose your deposit, but you could be up for any subsequent loss the developer makes on selling your property.
If you're keen to keep the property and avoid legal problems, then you'll need to come up with extra cash.
Buyers can try to bridge their funding gap by:
- Using cash to cover the extra.If you've continued saving money since purchasing the property you may need to use some of this money now.
- Borrowing more money.You could approach your lender and see if it's willing to lend you more. This will depend largely on your financial position (income, expenses and debts) plus the current value of the property.
- Approaching another lender.If your current lender re-values your property and refuses to finance you then you need to find another lender. This is the kind of situation where a mortgage broker can help.
- Adding someone to the property title.This might not be possible depending on the law in your state, but you could add another person to the property title and get them to help financially.
- Getting help.You could also try borrowing money from a family member if that is an option.
You may also be able to on-sell the property prior to settlement, allowing you to find another buyer and recoup some of your losses.
This will depend on the specifics of your contract and the law in your state or territory.
In my mind, for many investors the best decision would be to crystallise their loss by selling up and purchasing an investment grade property instead.
Unfortunately it is common for investors to make mistakes, it's part of the learning journey we all have to take.
Off the plan apartments have always made terrible investments.
A recent study by BIS Oxford Economics showed:
- Since 2011 - Melbourne: 66% of buyers (2 out of 3 buyers) of off the plan properties in Melbourne have had no capital growth or still have negative equity in their properties today
- Since 2011 – Brisbane : 48 % of buyers (1 out of 2 buyers) of off the plan properties in Brisbane have had No capital growth or still have negative equity in their properties today
- Since 2015 - Sydney: 23% of buyers ( one out of four buyers) of off the plan properties in Sydney have had No capital growth or still have negative equity in their properties today
If you're wondering what’s ahead for property you are not alone.
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