You see… industry insiders are worrying about a ticking time bomb, that the average property punter is not aware.
As if those who recently bought off the plan apartments didn’t already have enough to worry about with an oversupply of new apartments and tougher lending criteria, a recent report prepared by Corelogic for The Australian shows that nearly half of the new apartments that were settled last month in Sydney and Melbourne markets had valuations that came in at less than the buyer paid.
Many of those investors committed to their purchase a number of years ago when the climate was very different.
CoreLogic found that 45 per cent of new apartments in Sydney settled last month with valuations which were undertaken at the completion of the project so the purchaser could obtain finance —were below the off-the-plan purchase price, up from 18 per cent a year ago.
In Melbourne, 46 per cent of investors settling on their properties found they overpaid as mortgage valuations fell below their purchase price.
This compares with 23 per cent a year ago.
At the time these investors made their original purchases sentiment was high, foreign investors were clamouring to buy off the plan apartments in our two big capital cities – Sydney and Melbourne; and local investors were happy to put down a small deposit anticipating strong capital growth prior to completion.
But boy have things changed!
Currently falling property values, tighter lending standards, a looming oversupply of new and off the plan apartments creating higher vacancy rates as well as Labor’s proposed tax changes if elected, are creating a ticking time bomb for those many investors who are still waiting to settle there off the plan purchases.
And matters will only get worse over the next two years as construction of many of the projects currently under construction completes.
The problem is that off the plan property buyers can’t obtain pre-approvals to finance their purchase, as these are only valid for 90 days.
This means many put down a 10 per cent deposit intending to finance the remaining 90 per cent of purchase price on settlement.
However, many of these buyers will not be able to obtain finance to complete their purchase because of the lower valuations they will at a time when the banks are lowering their loan to value ratios for some of the planned purchases than significantly restricting lending in other projects.
The result is that banks will ask buyers to top up their deposit, but many will experience finance shock as they won't have the spare $20-$30,000 to make up the difference
A gamble that can cost a fortune
Buying off-the -plan is a gamble on how the market will perform.
Buyers decide to purchase a property often before construction has commenced.
They exchange legally binding contracts agreeing to purchase the property at a set price when it is finished, gambling that the value of the property will rise over the 2 years or so until completion.
Buyers typically put down a 10% to 20% deposit but do not secure a mortgage until a few months before completion.
If they can’t find the money to complete they are in default on their contract, forfeit their deposit and face being sued for damages.
These damages can total the difference between the reduced price the developer finally achieves for the property and the original agreed price.
Their problems will be compounded by the fact that many will have paid above-market prices thanks to incentives offered by the developers and they will find they have a bigger shortfall than they anticipated on completion.
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Where is the problem the biggest?
The Australian Bureau of Statistics estimates 100,000 units were under construction at the end of the September quarter last year — the most recent figures available
RiskWise Property Research has compiled a list of the Top 10 Danger Zones throughout Australia, identifying areas with a large stock of off-the-plan units, especially in the cases of oversupply, to be the most at risk.
Three NSW and three Queensland suburbs made it on to the list as well as two each from Western Australia and Victoria.
Adelaide (postcode 5000) came in at No.11.
But it gets worse
Many off the plan purchasers were foreign residents hoping to secure a loan in Australia for their property.
And many didn't even have a deposit saved up - they borrowed for their deposit back home.
Now China is making it hard for it's nationals to take money out of the country, Asian banks are reluctant to lend for Australian property purchases and local banks have all but stopped lending to foreign residents.
Yes ...it's a ticking time bomb waiting to explode!
It won’t be rosy for those that settle.
A glut of new high rise apartments is likely to hit the market with the peak in projects being completed coming later this year, but this will be the time that some investors scramble to sell their properties at the same time as the developer will have to try and resell their stock.
This is of course likely to make the value of similar properties plummet and drag down the value of those investors who had the financial discipline to settle.
I’d be staying well clear of the inner CBD apartment market and surrounding suburbs as this is where much of the fallout will occur.
How to avoid the 'time bomb'
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.
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