In a quite alarming story, thousands of investors face financial ruin because they won’t be able to settle the off-the-plan apartments they signed up to buy.
In a recent Real Estate Talk show Michael Yardney, from Metropole Property Strategists, tells us about the ticking time bomb for “Off The Plan” Property Investors that could see thousands of investor face financial ruin because they won’t be able to settle the apartments they have signed up to buy.
Here’s a transcript of the interview:
(Alternatively you can listen to the short podcast at the top)
Kevin: It’s pretty terrifying for people buying off-the-plan.
Can you talk us through what’s going on?
Michael: It’s nothing new – it’s happened in previous property cycles, as well – but it’s going to come as a bit of a shock to investors, while the industry insiders know what’s happening.
Apparently, there are 90,000 investors who have currently purchased properties off-the-plan but have not yet settled.
Most of those were bought with small deposits – 10% or 20% deposits – but they haven’t obtained pre-approval for the balance of the finance, because you can’t obtain it for more than 90 days.
They’ve purchased now on the promise that over the next year or two, the value of their properties will increase, so some of them hoped they wouldn’t put any more money in at all.
A couple of months ago that was likely as the banks would have lent you 90%.
But with the regulations enforced by APRA on many of the banks, it’s actually going to be hard to even get 70% loan-to-value ratio.
This means that many of these investors just won’t have the finance to settle their purchases.
Kevin: You mentioned there are 90,000 buyers.
That’s the number of contracts we know, but how many of those are exposed in this way?
Michael: According to CoreLogic RP Data, the suggestion is that about 18,000 of them have only put down a 10% deposit, so clearly it’s not all off the plan buyers who are in potential strife.
Interestingly, it’s more the Australians; many of the overseas investors have put down bigger deposits – often about 30%.
Kevin: So the situation is they’ll either have to come up with more money or the upshot will be that they can’t settle, in which case, what would happen to the deposit that they have put in?
Michael: We’ve seen this back in the 1980s when a lot of people bought off-the-plan on the Gold Coast and couldn’t settle.
They forfeited their deposits and thought, “That’s okay. I’m just going to walk away.”
The trouble is the developer, who you’ve signed a legally binding contact with, has the right to sue you for any loss he makes.
They’re then going to have to on-sell the properties at whatever price they can get, and then they can come and pursue you for the difference, plus their legal costs.
You may end up losing more than 10% of your deposit.
Kevin: The impact could be quite high, especially if –in the worst-case scenario – we get 19,000 new pieces of stock coming onto the market.
That’s going to flood the market.
Michael: It will, and that will make it hard for those who had the financial discipline to be able to settle, because if you bought a property today, and let’s say your contract is for $500,000 and in two years time when you settled, you had hoped it would rise in value to $550,000.
The property may only be worth $450,000 or $480,000 because there’s going to be that flood that you were just talking about.
The banks are only going to lend you 80% not on your contract price but on the valuation they give at that time in the future, which will be based on the prevailing market conditions.
Kevin: What do you believe is going to happen as the upshot of this?
Michael: There’s going to be a downfall of properties in those areas where there’s large complexes of off-the-plan properties, particularly in the Melbourne CBD area and Brisbane CBD area, and there will be some around the areas of Alexandria in Sydney where there’s been a lot of off-the-plan properties, as well.
But not only in those areas; there will have to be a bit of a ripple effect in the surrounding suburbs, as well, when property values will plummet.
Those who bought off-the-plan in their self-managed super fund, this is unfortunately a scheme that a number of promoters have been pushing.
It’s even worse because at the moment there’s no lender who is going to lend more than 70% for self-managed super funds.
Those people are going to have to come up with even more money, and they’re unlikely to have it in their SMSFs.
Kevin: What about developers?
What do you see on the landscape for them?
Michael: The developers are planning to get all these funds coming in.
Some developers are going to have a little bit of trouble because they’re not going to be able to easily sell all this excess stock, because once the news gets out and the confidence is lowered, there’s not going the swag of investors buying.
This is really investor stock.
It’s not the sort of property that owner-occupiers tend to purchase.
There could be a bit of a fallout with developers having financial troubles, just like what happened in the past.
Kevin: This really is what APRA has been about though, trying to dampen that enthusiasm within the market.
Michael: Their plan was to stop the investor frenzy that has occurred.
They didn’t plan to have a crash in a certain segment of property prices.
That’s not really good for anyone.
Kevin: It’s interesting to read that first-home buyers are now making up an even bigger proportion of investors, as well.
Michael: A lot of people have swapped from looking to buy their first home to continuing renting where they can afford to rent and where they like to live but can’t afford to buy, and instead getting into the market.
This is actually going to hit the financial pockets of some people who would in the future have been first-home buyers.
Kevin: What should they be doing?
Talking to their bank rather urgently, I’d imagine?
Michael: They can’t get pre-approval for three, six, or nine months – and definitely not a couple of years – in advance, so I guess if you have some time up your sleeve, number one, try to get out of your contract if you can.
Don’t ask the solicitor from the developer.
The question to ask your solicitor is not “Can I get out of the contracts?” but “How can I?”
Then, be diligent with your savings to make sure that you have the financial wherewithal to complete your purchase if these are the conditions that are going to be prevailing when you’re eventually going to settle.
SUBSCRIBE & DON'T MISS A SINGLE EPISODE OF MICHAEL YARDNEY'S PODCAST
Hear Michael & a select panel of guest experts discuss property investment, success & money related topics. Subscribe now, whether you're on an Apple or Android handset.
PREFER TO SUBSCRIBE VIA EMAIL?
Join Michael Yardney's inner circle of daily subscribers and get into the head of Australia's best property investment advisor and a wide team of leading property researchers and commentators.