End of the apartment boom: Further value falls forecast as off-the-plan risks rise
Australia’s apartment bust has caused hundreds of off-the-plan buyers to turn to Gumtree in a desperate bid to escape an increasingly risky market.
A new report has flagged a growing risk of cancellations by buyers of off-the-plan apartments who, despite paying an initial 10 per cent deposit are, no longer able to complete the purchase at settlement.
Investment firm UBS cites falling prices and tightening credit as the reason behind the mass exodus.
Apartment prices have fallen by 6.3 per cent and 2.3 per cent in Sydney and Melbourne respectively over the past year, with further falls expected, the report stated on Wednesday.
The New Daily found dozens of nomination contracts advertised on the online marketplace for off-the-plan apartments and land.
One seller, seeking to offload a contract for a $250,000 block of land near Mickleham, Victoria, cited a crackdown on lending by banks as the reason for the sale.
“I bought two block of lands and now bank lending policy [has] changed and it’s hard to register two parcels of land [at the] same time. So have to let one go,” the seller wrote.
While cancellation rates for off-the-plan apartments and land are currently at low levels “tightening credit, price declines, increased levels of incentives, lower deposits and a large amount of nomination contracts advertised on trading sites (ie Gumtree) suggest this will rise,” UBS said.
A ‘nomination contract’ or ‘nominee sale‘ allows a buyer who has paid a 10 per cent deposit on an off-the-plan apartment or land but is unable to settle – usually because of an inability to get a home loan – the opportunity to transfer the contract to another buyer rather than simply lose their deposit.
That’s why people are flocking to online classified ad sites like Gumtree to escape the pain of cancellation.
Lending for new housing is down 22 per cent from its peak, with lending to owner-occupiers plummeting and investors having largely fled the market.
For ASX-listed developer Mirvac, its most at-risk apartment projects are in the Sydney suburbs of Marrickville and Olympic Park – home to the troubled Opal Tower project – which “appear already out of the money with the Sydney apartment price index down 5 per cent since launch”, UBS said.
Mortgage broker Clint Howen of Hero Broker told The New Daily that banks have become wary of granting home loans for off-the-plan apartments due to a glut of stock hitting the market, falling prices, and fallout from the banking royal commission.
“There’s been so many apartments built in the past few years in areas that people were investing in [that] are now getting flagged as high-density housing,” Mr Howen said.
“Lenders look at those areas and say ‘That’s a risk and we want a larger deposit for the loan’.”
Falling home prices have also hurt confidence, with recent off-the-plan purchasers now concerned they won’t see a return on their investment.
“In a rising market you’re getting a good deal with off-the-plan because the market’s going up. It makes good sense and banks are happy to lend,” he said.
“Now the banks have come out and said all these apartments are risky and we’re getting stricter.
“When the market’s going up everyone’s happy, but when it’s down things start to get nasty.”
Off-the-plan too risky for average buyer
RiskWise Property Research chief executive Doron Peleg told The New Daily that off-the-plan apartments have become too risky for the average buyer.
“If you’re an unsophisticated investor do not buy off the plan. Buy an existing house with a view to the long term,” Mr Peleg said.
The collapsing market for off-the-plan units is due to apartment stock “piling up”, restrictions on foreign investors “who were very active in the off-the-plan market” just a few years ago, and buyers becoming more “risk aware”, Mr Peleg said.
Current off-the-plan purchasers are now weighing up “whether it’s financially viable for them to continue with the purchase or take the hit and buy elsewhere”, property strategist and buyer’s advocate Debra Beck-Mewing told The New Daily.
“[There are] plenty of nervous and disgruntled buyers who thought they were on to a sure thing, and unfortunate first-time buyers need to make the decision as to whether they keep that tiny studio in a block of 400 and work to pay the mortgage until they can unload the property,” Ms Beck-Mewing said.