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It's here: Australia's apartment price crash is real

Photo: Martin Hunter/ Getty Images.

Apartments in central Melbourne are being resold at discounts of up to 30 per cent from their original off-plan purchase price, sales data shows.

Not all units have fallen in value, but analysis of a handful of transactions shows many apartments have failed to hold their value between original purchase and resale, typically a few years later.

One property where prices have fallen is 27 Little Collins Street, which includes 171 apartments in a 32-storey tower above a Sheraton-branded hotel, completed by developer Golden Age in July last year.

A three-bedroom, two-bathroom apartment occupying 140 square metres and with two car parks sold for $1,565,000 in August, a 28.7 per cent discount on its November 2010 purchase price of $2,195,000.

A two-bedroom unit in the same building fell almost 23 per cent in less than a year, when it was bought for $1,075,000 last April, having previously been purchased for $1,320,000 in June 2014.

A number of smaller apartments without car parks suffered falls ranging from almost 4 per cent to 8 per cent between 2010 and their resale last year.

Melbourne’s surge in new apartments led to predictions more than a year ago than an oversupply was likely to push prices down. While greater supply would limit rental income growth, as long as interest rates remained low there was unlikely to be a big correction in prices because buyers could still fund the gap between rental income and their mortgage payments, said BIS Shrapnel analyst Angie Zigomanis.

“Anyone who’s bought an apartment off-plan and then looks to onsell within a couple of years will probably be looking at a 10 per cent decline, but the 40 per cent decline – it’s definitely not going to be the norm,” Mr Zigomanis said. “At the broader level those price falls will be mitigated by lower interest rates and the fact that people aren’t necessarily going to be obliged to put their property on the market.”

At 108 Flinders, a 190-apartment building by developer Riverlee completed in August 2014, data from five transactions shows prices are treading water or falling, the numbers from CoreLogic RP Data also show.

The figures point to a downturn in prices and demand for investor buyers of apartment dwellings.

“Generally speaking, you’re going to get a worse outcome if the apartment doesn’t appeal to owner-occupiers and only appeals to an investor,” said Matthew Baxter, a director of valuation firm Opteon.

“You’re more likely to have a more favourable outcome if the apartment you’ve purchased appealed to an owner-occupier as well as investors.”

Mr Baxter declined to comment on individual properties or their prices. The figures are not comprehensive and give no indication of the CBD apartment market as a whole.

Golden Age managing director Jeff Xu said sales in the building were limited and the rental vacancy rate was zero.

“Some apartments will lose value, but that does not mean every apartment project will lose value,” Mr Xu told The Australian Financial Review on Tuesday. “It depends on the location, quality and how you manage it as well.”

Settlement risks mount

But these figures confirm the growing concern about the scope for prices to fall in central Melbourne.

With the number of apartments due for settlement ballooning, concern is rising about whether buyers will be able to pay for them, especially at a time when banks are tightening their rules.

If banks value properties for less or cut the loan-to-value ratio they will offer customers, buyers are forced to pay more at time of settlement. If they cannot pay more, they may be forced to sell into a weakening market.

The CoreLogic numbers add to separate figures compiled by valuation firm WBP showing half of 1,794 properties purchased off-plan between December 2009 and August 2015 had been revalued below their purchase price.

WBP figures subsequently broken out for The Australian Financial Review in the 3000 postcode that includes central Melbourne show that the 197 properties valued suffered an average fall in value of $51,272, or 9.15 per cent.

In one case, a two-bedroom, one-bathroom unit purchased for $740,000 on 3 August last year was revalued at $600,000 – a 23 per cent discount – just 16 days later.

“For settlement risk, are we cautious? Yes, but are we worried? No. I’m not,” Golden Age’s Mr Xu said.

Developers could mitigate settlement risk by being in control of their sales channels and knowing who their customers were, and communicating well with them throughout the construction process, he said.

“After you know their background, you have to have strong financial reserves to be prepared if something happens,” Mr Xu said.

“If the customer cannot settle, you have to ask why. Can you give them some vendor finance, or help them to come through the hard period? They become loyal customers.”

This story first appeared in The Australian Financial Review. Read it here or follow the Financial Review on Facebook.

Now read: Here’s the best explainer we’ve heard on how Australia’s apartment boom could bust, and soon

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