With Australian home builders falling like flies amid soaring materials costs, as well as the prospect of soaring interest rates and falling property prices, Justin Lawrence – a partner with Henderson & Ball Lawyers – believes a “perfect storm” fraught with danger now faces buyers of off-the-plan properties:
“We could have a crunch where some buyers are re-assessed by lenders negatively, where they say that you are too great of a risk for us,” Lawrence says…
Sam Lally, from Buyer’s Advocate Australia, says at the end of the day, “a property’s loan-to-valuation ratio still has to stack up for a lender”…
Those who recently signed purchase contracts could find their valuation at completion comes in a lot lower than it is now, he says.
The risks associated with buying an off-the-plan property or purchasing a lot and building yourself have increased greatly this year.
First, with almost all home builders struggling to make a profit, and many falling into administration, there is the risk that a buyer of a lot could be left paying a mortgage on an unfinished home that they cannot move into.
Second, interest rates are tipped to rise aggressively from here, with most economists tipping another 2% of rate rises, and futures markets tipping another 3% hike in rates.
Under either scenario, Australian house prices could fall precipitously leaving both the off-the-plan buyer and first time builder in negative equity.
The off-the-plan buyer would then face a significant haircut on their original mortgage valuation, meaning they would be required to stump up the difference to qualify for a mortgage. Off-the-plan buyers who cannot come up with additional funds and are are unable to settle their contract risk losing their deposit and, in worse cases, could also be sued by the developers.
Given the risks, prospective buyers should steer clear of the new build market and seek an established home instead.
