Apartments may be more exposed to rapid and unexpected crashes than other property types, an investment advisory company has warned.
According to Daryl Dixon from Dixon Advisory, large volumes of off-the-plan sales can make apartment markets more volatile than other property types.
“Compared with sharemarket falls, which can be brutal and swift, downward property price movements are generally protracted as sellers holding out for higher prices ultimately are forced to lower their expectations,” he said.
“A special feature of the apartment market can, however, result in distressed forced sales. This is when a large number of off-the-plan sales negotiated before or during construction fall through.”
Mr Dixon pointed to the Canberra market as an example of this phenomenon in the wake of federal government job cuts.
“A recent example of this occurring is the setback in the Canberra apartment market due to oversupply and reduced public sector employment opportunities," he said.
“In this situation, a significant percentage of off-the-plan buyers were either unable or unwilling to complete their purchases.
“The resulting forced sales depressed asset valuations and made it more difficult for heavily geared purchasers to obtain credit to meet their commitments.”
He warned investors to be wary of these trends before entering into off-the-plan purchases.
“While one benefit of off-the-plan purchases is what can often be a lengthy time lag before money is required to complete the purchase, this can be a negative if personal circumstances change or property valuations fall before the settlement date,” he said.
The risks were currently higher than usual due to the buoyant property market, he said.