Risks for buyers in uncertain apartment sector

Despite reports of rising property prices and an emerging boom, the situation in the Canberra market is different, especially in the apartment sector.

In Sydney and Melbourne, the demand for apartments and houses exceeds the available supply even though record numbers of properties are being put to auction each week. Demand in these locations is being spurred on by record low interest rates, investment demand and interest from overseas investors. The rising prices will generate additional demand from buyers concerned to purchase before prices rise further.

Canberra market conditions are not ideal for people contemplating property purchases. Government cuts are likely to slow the growth of employment and the general economy in Canberra which has dampened the enthusiasm of investors. Despite this, the construction industry has been adding to the available supply of apartments.

Several large projects started as long as two years ago are nearing completion. This creates problems for some off-the-plan purchasers whose situation has changed from when they signed the contract. Typically, off-the-plan purchasers sign up because they expect prices will rise during the construction period, perhaps offering the prospect of a quick resale even before or after completion of the contract.

Anecdotal information provided by financial institutions and lawyers suggests that apartment market valuations now being completed are less than the agreed purchase price. That is bad news for purchasers because it reduces the amounts they can borrow or forces them to take out expensive mortgage insurance required when loan valuation ratios exceed 80 per cent.

There have been instances recently of purchasers being unable to complete their off-the-plan contracts and thus forfeiting their deposits. Unfortunately for them, that is not the end of the story because the developer is entitled to recover from any loss on resale of the property. These resales further weaken the market until new demand emerges to absorb the surplus supply.

The clear message for Canberra property buyers is to be cautious and certain about the merits of their proposed purchases. Off-the-plan purchases are particularly risky because of uncertainties including the time taken to completion, the quality of the final product and its value as collateral for a loan when settlement comes around. Off-the-plan purchases involve binding contracts. If the market situation changes during the construction period, the adverse financial consequences for the purchaser can be serious.

Rising property prices in other locations offer little comfort for Canberra residents yet to complete off-the- plan purchases undertaken in better times.

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Daryl Dixon

Executive Chairman

Daryl Dixon is one of Australia’s foremost investment experts and a well known writer and consultant. He has provided trusted advice to thousands of personal clients over more than 25 years and is an acknowledged expert in the areas of tax, superannuation (including public sector superannuation), social security and investments.

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