RBA Warns Against Buying Off the Plan
In the RBA October Financial Stability Review, the RBA highlighted risks in residential and commercial property development markets are rising and that banks will need to remain vigilant in relation to their appetite for risk.
The RBA said, “Risks to residential property developers appear to have increased over the past six months.”
There has been a tremendous growth of new apartment projects being built, especially in the CBD precincts of Sydney, Melbourne and Brisbane, with many more projects in the pipeline.
It was noted by the RBA that developers from overseas have been active in pushing up prices for development sites, which adds further risk.
The RBA said “The risk of a downturn in apartment markets is greatest in the inner-city regions of Melbourne and Brisbane, which look susceptible to potential oversupply.”
This is one of the reasons Latte Property have maintained over the years that property buyers should avoid buying CBD apartments.
Tighter Lending To Developers:
Several banks have already implemented tighter lending criteria to developers of apartments in the “at-risk” areas, which will most likely equate to the developers being required to inject more of their own cash into the projects. The banks will most likely also require the developers to presell more apartments before they qualify for their commercial finance.
The result can mean the project could take an extra year or more to get off the ground or in a worst case may never be completed. In this instance the buyers should get their deposit back from the Trust account but their money will have been tied up for several years resulting in lost investment opportunity.
Buyers that purchased Off The Plan in the CBD areas in the last year or so will most likely need to come up with extra cash to be able to meet their property settlements, due to the tightening of credit for investor loans in certain inner city postcodes. In some cases the banks are insisting on 20% deposits instead of the usual 10% deposits. If buyers are not able to come up with the extra cash, or borrow against another property, then they may not be able to settle and therefore stand to lose their initial deposit.
Another danger associated with the CBD apartments is that when there is a tightening of credit to those postcodes the bank valuations delivered are often quite conservative, ie they come in low, in some cases lower than what you would be able to sell the property for. This puts increased pressure on you at settlement to come up with extra funds.
For those buyers caught in this apparent no win situation, it is important to look further afield from your current bank. This is where knowledge and many years experience from an excellent mortgage broker can be a lifesaver. A broker with many years experience will know where to best source the right funding solutions. They will navigate through the dozens of different lender options to find one that is able to deliver the valuation that you need and is prepared to lend at the level required to meet your settlement.
Despite the major banks having implemented tighter lending restrictions, there are plenty of other options for finance out there and a quality mortgage broker will save you an immense amount of legwork.
Where Buying Off The Plan Works:
There are many reasons and benefits for buying Off The Plan apartments or townhouses, but you need to make sure you are buying quality stock that is in the right area. Shifting your focus to the suburbs just outside the CBD, yet not too far out, opens up a whole different market of quality properties.
Some of the boutique apartment projects in nearby suburbs, particularly those near excellent public transport and amenities, offer outstanding value and potential to deliver higher capital growth than CBD apartments.
Minimize Your Risk; Maximize Your Potential.
It is now more important than ever before, that you engage a reputable property specialist to ensure you buy quality property that will stand up to the new lending rules, as well as maximise your capital growth potential.
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