Investors warned about looming risks

With construction booming and a “substantial volume of new unit stock” being delivered to the market over the next two years, CoreLogic said investors relying on capital growth could be in trouble – with the report noting units are “much more likely to be owned by investors” but “capital growth for units has been substantially lower than that for houses”.

The report, titled Is record-high unit construction a risk to settlement?, flagged concerns for what this could mean for off-the-plan investors, saying “many off-the-plan unit buyers would have expected a level of capital growth between contract and settlement” and, with many mortgage lenders recently tightening their lending criteria, “some people who have committed to off-the-plan units may not be able to borrow as much as they could at the time of signing the contract”.

The problem, the report said, will be exacerbated due to various lenders raising mortgage rates for investors over the past 12 months.

This, combined with the increased levels of stock, presents serious risks for investors.

“Many of the units are coming up for settlement in similar locations and will compete with existing unit stock,” the report said.

“With so much stock coming online at once, there is an increasing concern as to whether settlement valuations will actually meet the contract price of these units.

“To compound the situation, three of the four largest banks have announced they will no longer be lending to overseas home buyers, which may result in a larger number of contracts not progressing through to settlement, considering a larger proportion of off-the-plan unit sales are to overseas buyers.”

CoreLogic RP Data research analyst Cameron Kusher said a comparison of the volume of stock set to settle over the next 12 and 24 months to the average number of annual unit sales over the past five years shows a “big disconnect”, particularly in the four largest capital cities.

“The large volume of new stock, coupled with an ever-growing supply of existing stock, means that historic high levels of unit settlements are due to occur over the next two years in most cities,” he said.

“In fact, even a recurrence of the peak year for sales in Melbourne and Brisbane over the next two years wouldn’t represent enough demand to cater for all the new units set to settle over the coming 24 months.”

Within Melbourne, Brisbane and Perth, most of the stock due to settle is located within inner-city areas – within a 10-kilometre radius of the city. Sydney, however, is “more geographically diverse” in its new unit supply, according to the report.

“While there are a lot of new units in inner-city areas, there are plenty also in outer areas like Parramatta, Strathfield, Auburn and Kogarah-Rockdale,” the report explained.

Mr Kusher said this “spreads some of the risk around the city, [unlike in] other cities where supply is much more centralised”.

The concerns raised by CoreLogic RP Data echo the sentiments of Century 21 CEO Charles Tarbey, who late last year highlighted the current exposure risk of buyers in markets such as Sydney’s Penrith, with particular regard to off-the-plan developments.

“A property in Penrith that was $300,000 two years ago, is now selling for $700,000. It could just as easily go the other way, particularly if interest rates climb,” Mr Tarbey told Real Estate Business in November last year.

Sydney’s western regions have boomed in recent years, fuelled by investors and home owners being pushed out of the inner city and increased infrastructure investment – but buyers failing to account for future rate rises in their repayment calculations are at particular risk, he said at the time.

“In 24 months’ time, if you’ve based everything on your salary today and the interest payments today, and the interest rates go from 4.5 per cent to 6 per cent, and the valuation comes down from 100 per cent of what you purchased it for to 90 per cent of what you purchased it for, there could be a very serious issue looming.”

In March, Mr Tarbey reiterated these concerns, warning that “mum and dads” who paid deposits on multiple off-the-plan properties could be at risk if valuations fail to match prices.

“They’re not major investors, they are mums and dads that are starting out. There will be a few of them, and they are going to have to sit there and question whether or not they can come up with the extra cash if the valuations don’t meet the contract price that the properties are sold at.

“That’s the greatest risk.”

[Related: Investors not to blame for affordability crisis]