Off-the-plan investors are starting to feel the pressure as their properties are not holding to their original value. How should an investor respond? A ‘Plan B’ to cope with this outcome should consider:
Having sufficient savings to meet a valuation shortfall or consider LMI
If you purchase a property for $600,000 and it is valued at only $550,000 you would have to cover an additional $40,000 to settle. The alternative is to borrow within Lenders Mortgage Insurance (LMI) which is an insurance paid by you to cover the bank’s risk.
Selling investment assets to fund the shortfall
If your property is valued less than the purchase price and you do not have savings to cover the shortfall, you could consider selling shares or other liquid assets that are easy to access. Selling shares can be a great idea to cover a shortfall if you do not have savings, however you should be aware of potentially triggering a Capital Gains Tax (CGT) event and you should talk to a qualified accountant first to be clear on your tax obligations.
The long-term benefit of property investment
Although your property may be valued less than your purchase price now, are you willing to hold the property through an investment cycle? On average, property prices increase in value every five to ten years, so you must be prepared to hold the property long term. Keep in mind that you do not experience a loss until you sell your property, so any short-term market fluctuations will not impact you.
The increased risk of off-the-plan purchases in a slowing housing market
Due to the recent slowdown in the housing market, additional risks to off-the-plan purchases are evident. The effect of this market direction is impacting the predicted 27,000 new apartments which will enter the Sydney Metro between 2017-2018.1
Downward pressure in prices are resulting in unfavourable valuations, with some apartments being valued $80,000 less than the original purchase price.
The ABS Building Approvals for April 2018 further lament the market direction as a total of 19,038 units have been approved nationwide. This is a 5.7% increase from April 2017.
Suburbs under off-the-plan valuation risk
As the onslaught of completions and approvals outlive the perceived “property boom”, I expect no immediate improvement in the valuations of off-the-plan properties.
High-density residential developments such as Waterloo, Zetland, Parramatta, and Docklands are particularly at risk.
1. Preston Rowe Paterson (2017) Sydney Impact Report – Residential Development Market http://prp.com.au/wp-content/uploads/2017/05/Sydney-Resi-Dev-MAR-2017.pdf
Australian Bureau of Statistics (2018) Building Approvals, Australia, Apr 2018 http://www.abs.gov.au/ausstats/abs@.nsf/mf/8731.0
Alfred Moller
Expat Lending Specialist
Residential and Small Business Lending Specialist
Omniwealth
D: +61 2 9112 4360
alfred.moller@omniwealth.com.au
www.omniwealth.com.au