Ticking Time Bomb for Property Investors

Thousands of investors face financial ruin because they won’t be able to settle the “off the plan” apartments they signed up to buy.Housing Bubble

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.Finance has now become both more expensive and harder to secure

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.A gamble that can cost a fortune

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.

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.

Time Bomb


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.

And those able to settle may still find themselves in a heap of trouble as they’re likely get stuck with negative equity.Bomb

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.

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



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'Ticking Time Bomb for Property Investors' have 34 comments

  1. Avatar

    March 29, 2019 peter papageorgiou

    has anyone asked why all the foreign investors and local investors are moving out of residential property in droves? Greedy State Government land taxes and stamp duty
    A local property investor in, say an apartment or standalone house that has a site valuation of even say $550,000(that is the lower end, site value of most city properties) would pay an annual land tax in Victoria $875 PA but an absentee owner of that same property would pay $9125.00 PA how ridiculous is that,.this change came about in 2017. Every absentee owner that has been caught in this bear trap is going to be throwing their keys in the middle of the road for anyone to pick up .Our leaders have let the property sector down by firstly exposing all of us to foreign investors that, if they panic and start selling at once ,which is what is happening now will absolutely crush values and send most exposed investors,owner occupiers, tradies real estate agents ,architects, engineers,property advisers, builders ,developers,retirees will be hit hard .there will be blood on the streets.


  2. Avatar

    March 28, 2019 Paul

    Thanks Michael,
    So what is tour advice for us who are in this situation. We bought an off the plan property (at the peak) with a 10% down and incentive from the developer (no stamp duty) with an 18 month build time. The marked dropped considerably. The valuation came in considerably lower than paid. We were then unable to get conventional finance. We kicked in another 10% deposit and were still unable to get conventional finance. Eventually we settled, rented it at below expectation, and are currently holding onto the asset as a negative geared asset, in the hope it will gain growth over time.


    • Michael Yardney

      March 28, 2019 Michael Yardney

      Paul, I’m really sorry to hear that – sometimes you just have to sell and cut your losses


  3. Avatar

    June 17, 2016 NOEL

    In my view Mid North Coast is a great place to invest in units. I did my research 6 years ago and bought 3 units, great returns of 5% and never short of tenants.

    I’ve just sold one of them and enjoyed almost a 50% capital gain over 2 and a half years.

    My point is there is no need to stick to capital cities whereby you’ll do much better elsewhere wih minimal risk.

    Why buy 1 property when you can have 3 for the price of one i rest my case.


    • Michael Yardney

      June 17, 2016 Michael Yardney

      I’m glad your investments performed well Noel. Why would you seel it if the unit grew so well?


      • Avatar

        June 20, 2016 NOEL

        i’m going to top up my super portfolio, so as to have a good balance of property and super better tax effective specially nearing retirement age.which ever way i see it love property, but too many expenses per say however, my remaining bricks and mortar are for long term as it should be viewed i have set up line of credit for cash flow.

        Super is a diverse investment Michael and can be fruitfull wether be a TTR which i have or set up SMSF which i’m considering.


  4. Avatar

    June 17, 2016 Raj

    Hi Michael,
    What do you think of the apartment market in the middle suburbs like Malvern East and Caulfield


    • Michael Yardney

      June 17, 2016 Michael Yardney


      In general these are good suburbs – but steer clear of new and off the plan projects there – there’s a huge oversupply looming in Caulfield in particular


  5. Avatar

    June 17, 2016 George

    OK Time for an update on this previously published article. Been here, done that. The simple way around this is to tell the bank you are taking out a home loan and not an investment loan. They wont hesitate to do this as they want the business too.


    • Michael Yardney

      June 17, 2016 Michael Yardney

      Thank you for reding my material so carefully that you realise when i republish an article – with thousands of new readers every month, I tend to republish articles for their benefit.

      By the way – what you recommend is credit FRAUD – you new apartment won’t look good form a prison cell


  6. Avatar

    August 7, 2015 [email protected]

    Great debate folks, hey Scott you may consider investing resi Adelaide..say 4-5km form the cbd Ovingham – Prosopect area, much cheaper than the eastern states. large blocks, certainly gentrification, hold for a decade then become the developer. Keep renting where you are. Theres your super all sorted. Remember, stats are across the board. there is a good 15% plus growth in certain loacations..even in Adelaide. Stay cool mate!


  7. Avatar

    August 2, 2015 Rod

    Just a note for your keen followers. As a broker I can say that banks are tightening up on lending LVR’s( Loan to value ratios) but can still lend at 90% including mortgage insurance at the moment. Without doubt some lenders will further retract and some will remove themselves from investor lending full stop as AMP have done last week. Tip to buyers off the plan is to get saving really hard to bridge the gap therefore minimizing the impact.


  8. Avatar

    July 31, 2015 Danny

    This change in investor lending rules has been taken advantage of by the banks, and in the renegotiation of my investment loans I am hearing from my bank that they are “obliged” to raise interest rates for investors.I think they are just trying to make more money. Along with this I have found that I cannot use the equity I hold in my properties for construction of homes unless I can afford to pay principal and interest on the loan!! A few weeks ago I could’ve accessed the equity easily, interest only…no questions asked.


    • Michael Yardney

      July 31, 2015 Michael Yardney

      Yes Danny – you can see why I’m a little concerned


    • Avatar

      August 1, 2015 Scott

      I feel for you Danny. I really do…. must be tough that you now need to service a loan like an OO.

      Great news for us people trying to find an affordable and stable place to live.

      Maybe soon prices will come down to a more reasonable level.



      • Avatar

        August 2, 2015 Danny

        Thanks for our concern Scott! But like most former OOs.. I’ll get around it 🙂 I have to, there is a need for more stock so we need more construction here 🙂


        • Avatar

          August 3, 2015 Scott

          Good luck Danny. Yeah more “stock” needed.

          I hear there is plenty on the way. A “glut” some may say, great for your supply and demand

          I hope your as upbeat when it falls over and your “stock” is worth less than you paid for it, or it is returning SFA from the lowered rent due to oversupply and increased competition.

          Enjoy your day champ.


          • Avatar

            August 3, 2015 Danny

            It’s good to be positive Scott. Just buy carefully in good areas that people want to live in, aim for growth in the long term, and not rental return, look after your valuable tenants and you won’t fail. It’s along term investment. I’ve been investing for almost 30 years in property and I’ve never looked back. It’s not a place for those who want to make a quick killing. Property cycles come and go, you balance the good and the bad times. There will always be doomsayers, but in the long run, I’ll succeed … But thanks for your concern. Have a good week Scott!

          • Avatar

            August 3, 2015 Scott

            Seems the type of values you have as an investor are few and far between in this day and age. The “new” landlord, couldn’t care less about the tenant or even upkeep and presentation of the asset.

            I think that can’t loose mentality could be Australia’s Achilles heel to an extent, the younger breed of “investor” might not be so lucky as the boomers. Time will tell I guess.

            The world is changing.

  9. Avatar

    July 31, 2015 JT

    So do we laugh or cry if apra themselves bring about a crash they think they are preventing thanks to their actions.


  10. Avatar

    July 31, 2015 George

    Same old thing every property boom. M.Y. is not predicting anything new here. Like me he has been around for a long time and so has seen this happen almost every property boom. I wouldnt place my bets on the Chinese holding up the off-the plan market either. With our dollar crumbling so is the value of their investment. That alone could cause a panic sell-off at any time. If they have a financial crisis in China then watch them all sell up at the same time. So foreign investors dumping thier property stock wont be pretty either. That is another major risk nobody has even mentioned. Its no wonder the RBA, APRA and the major banks are starting to take pre-emptive precautions. The writing is certainly on the wall if anyone chooses to read it. Anyway MY, shrewd investors will sell-on their off-the-plan purchase to some other late to the party speculator. There is no need to wait till completion to sell your off-the-plan investment. It doesnt take much to double your deposit on these.


  11. Avatar

    July 31, 2015 Scott


    I thought Australian real estate never goes down? borrowing against equity…. SMSF to buy property…..Cheap credit…

    About time they put the leash on all this speculative “investors” and give the people looking for a place to live and raise a family a go.

    The state of the rentals these days is 95% of the time disgusting, without the “landlords” even bothering to clean the joint… Try asking them to fix anything! Very lucky if you get a decent one who will look after the tenants and asset.

    Sitting on the sidelines with money in the bank until it all comes unstuck and these over leveraged “investors” realize they were sold lemons…very expensive ones.




    • Michael Yardney

      July 31, 2015 Michael Yardney

      You’re right Scott – it is a myth that property prices never go down – they do cyclically.
      But the price of well located capital city properties never “crash” – at least they haven’t since the 1890’s.
      I wouldn’t be buying these high rise apartments even when their values do plummet


      • Avatar

        July 31, 2015 Macy

        I don’t think so. Heaps of people talking about the crash for a long time and it didn’t happen. One major factor you are forgetting is there is heaps, I means HEAPS of overseas Chinese money coming in to buy these off the plan units. They don’t rely on local finance to buy so valuation does not stack up doesn’t worry them. If the price does not rise up they simply hang on to it. When they compare properties here to their local countries, it has CHEAP AND STEADY ALL OVER THEM. There won’t be a crash, those did not buy today, will again, like few years ago, miss out again.


        • Michael Yardney

          July 31, 2015 Michael Yardney

          You’re right – the overseas buyers tned to put down bigger deposits and have different sources of finance. It’s the local specualtors who’ll get caught out.

          By the way..I’m not predicting a crash


        • Avatar

          July 31, 2015 scott

          I guess we will see Macy. Once in a century commodities boom kept us afloat during the GFC. Hows it going now. Business confidence and investment flatlining….

          More job cuts each week. Lots of infrastructure projects scrapped…

          Shanghai stock market chaos..tightening regulations on investmentors, both foreign and local, possible o er supply on its way. FED to raise rates in the US…

          Median house price e 1M…aging population.

          Is your wage keeping up with housing increases?

          Good if you own some and not leveraged to the eye balls


          • Avatar

            October 19, 2016 Lee

            I agree Scott. Asian countries at least have a manufacturing base. Most Sydney people who are late into the real estate market are just thinking that their rental house/apartment is a way of becoming rich. Whatever happened to actually making something and then selling it.

    • Avatar

      July 31, 2015 George

      Scott. You are exactly the type of investor that MY is referring to.


  12. Avatar

    July 31, 2015 CanberraInvestor

    I have been through this a couple of years ago and it is very scary to face the possibility of defaulting. My mistake is a warning for others about researchign properly before signing up. I purchased a Melbourne CBD (bad decision and boy have I learned a lesson) – not only was the value under purchase price, but it was classified as a small apartment as the valuer used the inside skirting rule to measure instead of middle of the walls (even though I am still responsible to middle of the walls if anything happens) taking it below 50m2. this meant that my lenders would only lend to 60 or 80% of assessed value. so not only did I have to fund the shortfall between purchase and value, I also had to find another 20% for what they wouldn’t lend to. I managed to make it work so at least I have a reasonable cash flow property, but am behind in the capital gains. given the way lending practices are now, I am sure it will be even worse.


    • Michael Yardney

      July 31, 2015 Michael Yardney

      Thanks for your warnings – yes some off the plan investors will learn some very difficult lessons over the next few years


  13. Avatar

    July 30, 2015 Ainslee

    that could be a big problem for many off the plan buyers – but how will it affect surrounding suburbs?


  14. Avatar

    July 30, 2015 Tim

    Another great article Michael – there’s going to be some blood on the streets.
    I know a few people who bought off the plan properties in their SMSF, having gone to spruikers – boy are they stuffed


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