30% of Sydney buyers are moving into new apartments worth less than what they paid for

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  • A massive 30% of newly-completed apartments in Sydney, and 28% in Melbourne, settled with a valuation less than their original contract price in September, according to data from CoreLogic.
  • Sydney and Melbourne’s median home prices have fallen 4.1% and 4.4% respectively this year.
  • CoreLogic says this heightens settlement risks as well as the prospect of an increase in loss-making resales.

More than a few people in Sydney and Melbourne are discovering the danger of buying an apartment off the plan at the peak of a housing boom.

According to Metadata from CoreLogic’s Valex platform, a massive 30% of newly-completed apartments in Sydney, and 28% in Melbourne, settled with a valuation less than their original contract price in September.

That reflects Melbourne and Sydney’s median home prices which have fallen 4.4% and 4.1% respectively since the end of last year, along with the time it takes to complete an apartment complex.

With the recent downturn, it’s meant a large proportion of buyers are now taking possession of a property that’s worth less than what it was purchased for.

And given there was huge pipeline of new apartment stock being built at the end of the June quarter, Lawless says other off the plan buyers in Sydney and Melbourne may soon be in a similar position.

“Many of these apartments would have been sold off the plan, at a time when housing conditions were much stronger and credit conditions weren’t as tight,” says Tim Lawless, Head of Research at CoreLogic.

“With the unit construction cycle moving through an unprecedented peak, the settlement phase will be an important facet of the market to monitor.”

Lawless says the combination of record new apartment supply and falling prices means that settlement risk is now “heightened”.

“Off-the-plan buyers who find their valuation comes in lower than the contract price at the time of settlement could be in for a rude shock,” he says.

“Lenders will generally be looking for a loan to valuation ratio of at least 90%, more often closer to 80%, meaning their deposit will need to be at least 10% and potentially closer to 20% of the property value.

“If the valuation comes in lower than expected, the buyer may need to top up their deposit in order to meet the lenders loan to valuation criteria.”

Under such a scenario, Lawless says that some buyers may not have the additional funds required, potentially seeing the contract fail to settle and likelihood of the buyer losing their initial deposit.

With prices in Sydney and Melbourne now falling, Lawless says recent examples from smaller markets across Australia suggests there’s a risk that resale values of new apartments may also be lower than what they were originally purchased for.

“Markets where unit supply has been high and market conditions weak have seen a surge in loss making re-sales,” he says.

“Brisbane and Perth are prime examples.”

You can find more information at the CoreLogic website.

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