Yahoo Finance Half of new Sydney and Melbourne apartments now valued BELOW their purchase price
Almost half of all new units in Sydney and Melbourne that settled last month were worth less than what they were originally purchased for, according to a report from the Australian.
Based on data from CoreLogic, 45 per cent of new apartments in Sydney that settled had valuations below their off-the-plan purchase price, up from 18% one year ago. In Melbourne, the figure was even higher at 46 per cent, double the level reported in February 2018.
The sharp increase in the proportion of homes worth less than what they were bought for reflects that conditions in Australia’s largest and most expensive housing markets have changed significantly over the past few years, said Tim Lawless, Head of Research at CoreLogic.
“For units that were bought off the plan two years ago, so much has happened,” he told the Australian.
“There are fewer investors, fewer foreign investors and it’s harder to get finance.”
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The fact that nearly half of all off-the-plan units are now valued less than what they were originally sold for is not all that surprising given prices in both Sydney and Melbourne have now been falling for well over a year.
In just the past 12 months alone, median unit prices in Sydney have fallen by 7.8 per cent. In Melbourne, median prices have fallen by a smaller 3.7 per cent over the same period.
Late last year, CoreLogic warned that the combination of record new unit supply in these markets, coupled with tighter financing conditions and falling prices, could lead to “heightened” risks for those looking to settle on their property purchase, along with property developers.
“Off-the-plan buyers who find their valuation comes in lower than the contract price at the time of settlement could be in for a rude shock,” Lawless said at the time.
“Lenders will generally be looking for a loan to valuation ratio of at least 90 per cent, more often closer to 80%, meaning their deposit will need to be at least 10 per cent and potentially closer to 20 per cent of the property value.
“If the valuation comes in lower than expected, the buyer may need to top up their deposit in order to meet the lenders loan to valuation criteria.”
With property prices continuing to decline in both cities, it appears those risks are growing given nearly half of buyers are now looking to settle on units worth less than what they were originally purchased for.
“Not a lot of people have spare $10,000 or $20,000,” Lawless told the Australian, referring to the ballpark figure some buyers may have to find in order to obtain finance to settle on their property.
“Considering the large number of units under construction in Sydney and Melbourne, as well as Canberra and Adelaide, we expect a peak in settlement activity will occur over the next two years as construction completes.”
So settlement risks could remain elevated for quite some time, especially should prices in both cities continue to decline this year and next as some forecasters currently believe.
Those risks have also not gone unnoticed by policymakers at the Reserve Bank of Australia (RBA), including for property developers given the impact of tighter lending standards.
In a speech delivered in November last year, RBA Deputy Governor Guy Debelle said that “tighter lending standards could amplify the downturn in apartment markets if some buyers of off-the-plan apartments are unable to obtain finance”.
“This could lead to an increase in settlement failures, further price falls and even tighter financing conditions for developers,” he said at the time.
A recent report from Ernst and Young (EY) Australia said that Australian property developers were facing a downturn of the scale not seen in 30 years, warning that property developers should be taking measures to protect themselves.
“Shrinking profit margins may prevent developers from recycling capital and profits into future existing projects which may put those projects in jeopardy,” the report said.
“This could lead to an increase in ‘fire sales’ which will re-set the market and cause further concern from a finance perspective.”
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