As if those who have recently bought off-the-plan apartments didn’t already have enough to worry about, with a looming oversupply of new apartments and poor on-completion valuations; now tougher lending criteria could mean many won’t be able to settle their property purchases.
The problem is that off the plan property buyers generally 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.
Of course, only a few months ago this would have been easy with the banks falling over themselves to lend money to investors.
However, many of these buyers will not be able to obtain finance to complete their purchase because over the last few weeks the banks have suddenly tightened their lending criteria on the insistence of APRA (Australian Prudential Regulation Authority.)
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 two 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.
Buyers’ 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.
How big is the problem?
The Australian Financial Review reports that there are 90,000 apartments being constructed in Australia that have been sold off-the-plan but not yet settled.
The purchasers of about 20% of these, or 18,000, have paid a deposit of just 10% of the full purchase price, according to analysis of statistics from CoreLogic RP Data.
However, finance has now become both more expensive and harder to secure, with many lenders increasing their borrower interest rates and at the same time requiring a minimum 20% deposit funded by the purchaser.
This means many of these investors could struggle to find finance for the remaining 90% purchase price as banks are suddenly toughening up lending criteria for investors.
It may be even worse for those who planned to buy with their self-managed super fund, as some banks are now requiring an even bigger deposit for this type of purchase.
It won’t be rosy for those that settle.
Even those able to settle may still find themselves in a heap of trouble as they’re likely get stuck with negative equity.
A glut of properties is likely to hit the market as some investors scramble to sell their properties at the same time as many developers 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.
Michael Yardney is a director of Metropole Property Strategists, which creates wealth for its clients through independent, unbiased property advice and advocacy. He is a best-selling author, one of Australia’s leading experts in wealth creation through property. Subscribe to his Property Update blog.