- A huge amount of new unit supply is about to hit Australia’s property market at a time when demand is weak.
- RiskWise Property Research has identified 10 “Property Danger Zones” that buyers may wish to avoid in the year ahead.
- The group says purchasing off-the-plan units in many regions is “extremely high risk”.
There’s still a near-record amount of units being built in Australia, especially in Sydney and Melbourne.
At a time when demand is soft, thanks largely to tighter lending standards, uncertainty over tax policy on housing investment and widespread expectations that the current price downturn will continue for some time yet, an influx of newly-completed units undoubtedly creates the potential for further downside pressure on prices — both for new and existing dwellings — even with the renewed prospect of further RBA rate cuts.
So what areas are most at risk?
Based on the expected supply increase over the next two years, RiskWise Property Research has identified 10 “Property Danger Zones” that buyers may wish to avoid in the year ahead.
“Three New South Wales and Queensland suburbs made it on to the list as well as two each from Western Australia and Victoria,” says Doron Peleg, CEO of Riskwise Property Research.
Along with the expected growth in the amount of unit supply over the next two years, Peleg says a variety of other factors makes some Australian regions particularly vulnerable.
“Tighter lending standards, the results of the Royal Commission, political uncertainty, a sharp drop in dwelling commencements and Labor’s proposed taxation changes if elected, and you have the potential for major disaster,” he says.
“There are a large number of high-rise properties in our capital cities being offered to a smaller number of investors. This is because there are less investors in the market mainly due to credit restrictions.
“Also, lenders are being more cautious about their loan-to-value ratios (LVRs) and more discerning about who to lend to, meaning there are less buyers in the property market.
“Many lenders have black listed areas they have determined are high risk or are asking for significantly higher deposits, up to 30%, and this further reduces demand.
“This has resulted in a reduction in activity and this has a major impact on the market. Lenders understand that oversupplied suburbs carry a greater degree of risk — and those risks are just as real for the investors who buy in those suburbs.”
Peleg says an uncertain economic outlook, shift in housing preferences and Labor’s proposed changes to negative gearing and capital gains tax for existing dwellings — should it win the federal election — are other considerations that create additional risks.
“All this added up suggests that if the proposed changes to negative gearing and capital gains tax take place, it is likely to put off-the-plan units at their highest risk ever and this includes equity risk, cashflow risk and settlement risk,” he says.
“If you consider that many of the prices for off-the-plan units include a significant commission to the marketer, between 5-6% of the value of the property and sometimes even more, and with the current risks to settle the property… all of these things together make purchasing off-the-plan units in many regions in Australia extremely high risk.”
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