Another voice has joined a growing number of figures highlighting increased risks in the off-the-plan apartment market in Australia’s biggest cities.
The combination of a record building boom and a slowing market could trigger a significant number of defaults in 2016, according to a leading market commentator.
CoreLogic RP Data research director Tim Lawless said a default risk has emerged in parts of Australia where property prices are falling even as considerable numbers of off-the-plan homes come onto the market.
“If we saw those declines become sharper or more concentrated in areas of new supply, I think that’s where the risks become substantially higher,” he told Smart Property Investment’s sister publication REB in a video interview.
Mr Lawless said off-the-plan buyers could struggle to settle purchases if a significant gap emerges between yesterday’s contract price and today’s valuation.
Buyers would also find it difficult to negotiate new terms with their bank given the tightening lending environment that emerged in mid-2015, he added.
According to the Housing Industry Association, new home starts increased for a third consecutive year in 2014-15 to a record 211,860 and are forecast to exceed 200,000 in 2015-16.
However, all that new stock is coming onto the market at a time when CoreLogic RP Data statistics suggest that both Sydney and Melbourne appear to be cooling.
Mr Lawless highlighted two things that would need to happen if the country was to avert a default crisis.
“Firstly, we would need to have a market situation where the settlement value compared to the contract value is roughly the same, if not higher,” he said.
“The other element that may avert some of the risk is if we do see changes or some relaxation in lending policies, which doesn’t seem to be on the cards either.”
Mr Lawless’s comments come off the back of fears raised by other commentators at the end of 2015.
“Depending on what the area is, certainly out west and south west, there is definitely a chance of there being an oversupply of properties when they come onto the market,” he said.
“Number one; because a lot of those buyers are overseas buyers, what will they actually do with the properties when it comes time to settle? Number two; if there is a risk of oversupply, are the banks going to be able to value the properties at the purchase price when that apartment conceivably could have been bought at the peak of the market? If not, then you could have a lot of people in a pretty desperate situation trying to offload all these properties.”
Increased LVR requirements for certain types of investors may already be adding risk to the market, with reports emerging last year that SMSF investors in Sydney’s mortgage belt were being forced to abandon their off-the-plan purchases.