These stats show why you really must avoid off the plan apartments

You’ve heard me say it before but now the stats prove my point.

Off the plan apartments make terrible investments!

Analysis by BIS Oxford Economics reports that of the apartments sold off the plan during the past eight years:

  • Two out of three Melbourne apartments have made no price gains, or have lost money upon resale. And this is despite a record immigration and a significant property boom.
  • In Brisbane about half these apartments bought off the plan are selling at a loss, or at no profit. Buying Off The Plan2
  • In Sydney it is about one in four apartments bought since 2015 are selling at a loss, or at no profit.

In other words, more investors in off the plan high rise apartments have lost money than have made money.

And of course there are all those investors sitting on the apartments which are continuing to fall in value, but they haven’t crystallised their loss yet.

In 2018, 98,000 apartments were completed across the country and 65,000 in NSW alone, according to ABS figures and the situation is only likely to worsen considering the pipeline of projects still being completed.

According to the BIS research, resales of apartments within a three to five kilometre of central Sydney, Melbourne and Brisbane have realised consistently lower prices than established apartment resales.

To make things worse… 45168467_l

Today with falling property values a large portion of these off the plan apartments are completed they are valuing in at less than contract price at a time when nervous lenders are demanding a bigger deposit from buyers.

This double whammy will result in more off the plan investors having difficulty settling their purchases leading to rising defaults on settlements and major discounting by investors trying to get out of their purchases and developers trying to move their stock.

According to RiskWise, Brisbane’s inner-city apartment market has about 10,000 more homes in the pipeline than it should have,  suggesting the city is expected to face more defaults on settlement.

And there are long term problems as well…

There is no doubt that all those off-the-plan residential property developments have redrawn the skylines of our capital cities and many parts of inner and middle suburbia over the past decade.

The spread of high-rise living out of our CBDs to adjacent suburbs as well as into outer lying suburban strips has been remarkable.

But…

  1. Many of the tiny inner-city apartments built during the boom of the past decade are unlikely to meet the needs of Generation Y as they grow older. Sure more and more of us want to live in apartments  –  but not ones that are so small and ones that lack amenity
  2. Poor construction techniques, particularly the use of inflammable cladding, will devalue many apartment blocks. The high profile structural problems of the Opal Tower is likely to be only one of many stories of building defects

But the biggest risk for off-the-plan units are the proposed changes to negative gearing and capital gains tax if Labor wins governmentFuture Sydney Scenarios

Angie Zigomanis, associate director for BIS, was reported in the Australian Financial Review as saying:

“The removal of negative gearing benefits from established dwellings and quarantining it to new dwellings will further reduce the value of established dwelling related to new dwellings and is likely to exacerbate resale losses.”

Mr Zigomanis said OTP apartment prices are priced at a premium because they are new, as well as having negative gearing tax benefits, incentives and state government first time home buyer incentives.

“This has resulted in more limited upside in price growth for the first resale.”

what properties are investment gradeWHAT CAN YOU DO TO STAY AHEAD?  

As signs point to softer growth conditions for Australian property over the coming months, independent professional advice and careful consideration will be as important as ever in navigating Australia’s varied market conditions.

If you’re looking for independent advice, no one can help you quite like the independent property investment strategists at Metropole.

Remember the multi award winning team of property investment strategists at Metropole have no properties to sell, so their advice is unbiased.Whether you are a beginner or a seasoned property investor, we would love to help you formulate an investment strategy or do a review of your existing portfolio, and help you take your property investment to the next level.

Please click here to organise a time for a chat. Or call us on 1300 20 30 30.

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Michael Yardney

About

Michael is a director 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 his opinions are regularly featured in the media. Visit Metropole.com.au


'These stats show why you really must avoid off the plan apartments' have 2 comments

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    May 9, 2019 Ben Loveday

    All of this is absolutely correct. Assuming investors cannot afford the multiple millions for an inner urban house and land, one obvious solution is for investors to form a consortium and develop their own apartments (to live in or to rent out), which are not the normal shoe boxes, but rather energy efficient and liveable. Thus they would receive the development profits that have been taken out of OTP apartments. risks and opportunities can be mitigated by directly employing an experienced 3rd party development manager, as opposed to co-investing with a developer who is also managing the development. Another solution is to move to Adelaide, which still has positive price growth. Or both!

    Reply

      Michael Yardney

      May 9, 2019 Michael Yardney

      Ben – the problem with your first suggestion would be the consortium obtaining finance

      Reply


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