Off-the-plan property buyers drown in negative equity

Perennial housing bull, Michael Yardney, has issued a stern warning that off-the-plan apartment buyers face financial ruin as the market collapses:

In my opinion, off-the-plan apartments have never represented a good investment, even during the rosiest of boom times – and least of all during a once-in-a-century global health event.

Apartments in our inner cities, and particularly those in high and medium rise towers, are likely to see their appeal dimmed in the immediate future, with the pandemic revealing that living in close proximity to other potential germ-carriers can be risky, and that being cooped up in a tiny flat during a lockdown is no fun…

As you can see from the chart below, around half the off-the-plan properties currently being completed value at less than the original contract price, with many showing current values being more than 10 per cent below the original contract price.

For some buyers who have lost their job or had their hours cut as a result of the pandemic, meeting the original settlement dates will become a huge challenge…

The other thing to remember is that your lender will value the property upon completion, and in the current market, there’s a good chance this valuation will come in at a price that is considerably lower than the contract price…

Banks are being more conservative than ever with their valuations.

As a result, buyers who have committed to an off the plan property could see their loan applications knocked back, or they may be forced to scramble for a larger deposit to cover the shortfall…

They stand to lose their deposit and walk away much worse off than they were before they signed that dreaded off-the-plan contract…

Unfortunately, the sad fact is that some investors who bought will be financially ruined by the combination of buying a property that was never a great investment, only to have this compounded by a global pandemic and recession just to dig the boot in a little more.

Those who manage to hang onto their properties will be the new owners of dwellings that are likely to become the slums of the future, in a market where rents are plummeting…

And those who are forced to walk away from their contracts?

Well, they could see their life savings squandered – right at the time when they need that safety net the most.

That’s a fair assessment by Yardney.

The COVID-19 pandemic has seen unemployment soar and employment income collapse, with millions of Australians now reliant on emergency income support to make ends meet. This income support will be withdrawn from October, creating a massive negative income shock:

Immigration has also collapsed at the very same time that apartment construction is running above decade averages across both Sydney and Melbourne, which is crushing rents:

Add into the mix the pending expiry of mortgage repayment holidays, and the picture facing off-the-plan apartment buyers and property investors is dire.

Many face the prospects of forced sales, settlement defaults, and financial ruin.

Leith van Onselen

Comments

    • I warned my sister before she bought 5 years ago OTP, but she went ahead with a 2 bedder in VIC, smaller boutique 3-4 levels.
      She got the advice from financial advisor at St George.

      It took nearly 3 years to complete, but was recently valued the same amount she purchased OTP, she was surprised it came in that high. She said it was a mistake, and should have known better being a business studies/economics teacher

    • Yeah, OTP’s are bad when the markets down and bad when the markets good, you can’t get finance and settle when the markets bad, and when the markets good, the developer will trigger the sunset clause if the prices have risen, so that he can cancel the contract and resell at a higher price….
      So, buggered either way!

  1. All these years of sitting on the sidelines in cash is starting to look pretty rosy right now.

    Just waiting for detached to also get sick. They might not projectile vomit like OTP but I am hoping for a nasty bout of the runs.

    • PaperRooDogMEMBER

      Not surprised! Also, I was under the impression if you bought OTP you were already paying at least 10% above true value.

      • but I also remember developers refusing to hand over keys to OTP buyers and canceling their contract and returning deposits so developers could sell on the spot market. Such was the market during the peak.

        • Yes. They were intentionally delaying the build completion to invoke the “sunset clause” which was ironically designed to protect buyers.

    • tripsterMEMBER

      Geez, developers were making out like bandits. Despite those massive profit margins they still couldn’t even build them to a decent standard. Speaks to their morals and character.

    • Holy moly! Does that mean prices can drop 30% in Sydney and developers would still make a profit on settlement?

  2. ashentegraMEMBER

    Cute. Yardney attributes the downturn to CV-19. Never mind that before the pandemic banks were redlining apartment zones, building defects and flammable cladding were found everywhere and AirBnB abuses made many blocks unlivable.

    Let it fall. Later, state governments can make them into social housing and lock in their status as slums.

    Do not underestimate the economic activity consequences of the equity erasure being endured by all apartment holders.

    The negative equity pain many are in is amplified by annual demands for body corp fees.

    They are truly, truly rooted.

    • Good. Good.

      Soon those adherents of Australia’s state religion, Property, might start to question their faith. Their DOG might desert them like the israelites.

  3. reusachtigeMEMBER

    Off the plan is a great way to purchase as it is very easy to look at sketches then secure your dream investment property then rent it for good negative income stream and have the tax man pay it off for you!

    • Savvy investors know the key to wealth is negative income streams! You’ve got to put in more than you take out – just like at the relations parties.

  4. The banks are extending the mortgage deferral period for OOs at the moment, not sure about IOs (less likely I would have thought).

  5. So if the apartment market goes SPLAT, what then of all the Chinese who bought up large? They will soon enough be well aware (thanks to Weichat) of the value of their investment falling off a high cliff. Are they going to sell their plummeting-in-price dogbox and take their now-laundered cash elsewhere? I would.

    As for the mug punters in Straya, they’ll come to love getting stuck with the massive and ever-increasing body corporate fees, along with the slum-style over-crowding in their building – if they can even afford to keep it. Oh the Joye…

  6. Anyone with Ubank account , get out asap as they have changed their terms and conditions as to when they can halt your account.. one basically says they can block if it doesnt suit their business to keep it open….😳..covering the run on the bank I think..worrying

    • Martin North last night refused to name which bank he thought would be the first to be bailed out. Westpac anyone?

      • I think it wouldn’t matter which bank as when it’s made public the other big 3 would have lines at branches & ATMs with people pulling their money out…..

    • frag outMEMBER

      Wouldn’t customers need to agree to that change covering the funds they have sought the banks services for?

    • macrofishMEMBER

      I am out to, ideas on a place to move it to?

      ING/Rabo/Citi/Something not australian lol?

      • That is my thinking, mostly RABO (which doesn’t do residential mortgages) and some ING.

        • RABO T&C
          5.2 We may impose any conditions or restrictions on your use of the Internet Banking Services, and we may alter, suspend or terminate your use of the Internet Banking Services if, in our reasonable opinion, such action is necessary:
          (a) to maintain the security or integrity of our banking systems or the Internet Banking Services;

          (b) to limit or prevent a suspected or potential fraud or illegal activity; or
          (c) to comply with any Applicable Regulations.

          https://www.rabobank.com.au/-/media/rabobank-au/files/pdf/rabobank-online-savings_tscs_1908

          • Thanks. Those seem vaguely reasonable at first glance – much less general than the catch all at the end of the UBank one…?

          • Over the last 12 months I’ve been randomly selecting institutions as potential safe-harbour for cash. Every institution I have looked at (including the local Building Society (IMB)) have similar T&C. There is no safe banking institution that I can find.

            I would prefer to be a creditor to the Perth mint with a cash account than an equity holder (as a result of an imposed debt for equity swap) in a “resolved” ADI bank. At the end of the day the Mint is owned & backed by the WA government, a Sovereign with the ability to impose royalties on “deep storage” aka ore yet to be mined mineral resources.

    • Thanks.. just checked the T&Cs and indeed, new section 4.16 includes:

      UBank may place a block on your account, suspend or remove your access to Internet Banking or Mobile Banking or not process a transaction where it is reasonable to do so including:

      – where we consider it appropriate and reasonable having regards to our legitimate business interests.

      And may not provide advance notice if blocking for the above justification.

      ‘legitimate business interests’ would clearly include stopping a bank run.

      • frag outMEMBER

        That is insane. If it’s not in the news tomorrow it will further support the MSM is broken and asleep at the wheel.

        • Tried taking money out tonight..it was blocked 😳 never done this before..only allowed transfer to my linked nab account…somethings up…

  7. Aud going through the roof now so it’s making it less attractive to any off shore buyers….

  8. Is it worth mentioning that the ALP’s negative gearing policy which they took to the last election would have pushed more people into OTP investments?

  9. UpperWestsideMEMBER

    I love that the Rabbit actually paid someone to write a report that stating that building to the moon would reduce the price of apartments. It is good to see the brains trust at work.
    Might I also suggest that they invest Tax Payer pesos in consider ing the following developer lead initiatives to reduce the price
    – no car parking, no fire escapes, no common space.
    – reduction of floor heights to 5ft 10in (for premium apartments 5ft 11)
    – use of thin film walls to save wasted interior space.
    – use of thin film walls to save external space
    – reduction in corridor widths to save space
    – thin film curtains instead of doors

    It is clearly elitist to have more space than you absolutely need. It is possible ( as seen in illegal student accommodation) to have a raised platform bed with combination kitchen/shower/dunny bucket below. Dunny bucket removes the need for interior plumbing spaces – leading to further efficiencies comrade! (Sorry Ermo).

    In this new world of the Sydney Soviet Suburbs we throw off the old elitist dogma of measuring apartment size from the inside and instead move to a progressive – modern -approach of measuring from the outside ( outer most extremity, flagpoles and other architectural features included), times the highest floor number ( ignoring any unlucky number missing floors) and prorating the calculated ‘floor’ space across the total stock of for sale apartments.

    Damn! I should have been a developer, or run for El Presidente !