Advertisements for off-the-plan apartments are everywhere, with illustrations and descriptions painting a rosy picture.
However, there are traps that first time buyers or investors might fall into if not careful.
As in every property growth cycle, when the markets are up, there is the danger of paying too much.
Sometime back, best-selling author Margaret Lomas warned in a column on Switzer to stay away from buying off-the-plan in this market.
“Off-the-plan carries more than the usual degree of risk, the best example being those who bought years ago on the Gold Coast and were forced to settle on properties worth $100,000 less than they paid,” she said.
Even valuation firm Herron Todd White has in its recent Month in Review: March 2017 said that house and land option in outer western Sydney should be on the radar for first home buyers as off the plan units, in a wide variety of locations, are unable to achieve their purchase price upon settlement, according to HTW’s .
The valuation firm says many of these units were originally purchased in stronger market conditions, particularly in 2015.
“This could be disastrous for a first home buyer after saving for a large deposit and having to come up with more money to settle,” the report says.
HTW says yields have tightened across the board with Sydney recording record low returns at 2.8% for houses and 3.8% for units, according to CoreLogic data.
It points to significant price growth and high investor participation that has resulted in a flooded rental market dropping rents.
Even the Reserve Bank of Australia has noted there is a danger that apartment buyers will default on off the plan purchases because of falling prices along with the difficulty of obtaining finance.
“These risks appear greatest in inner-city Brisbane and Melbourne, where the new supply is largest relative to the existing dwelling stock,” the Reserve Bank said in October 2016.
The RBA said the chance of developer sales falling through had been increased by new bank restrictions.
These included the restrictions on lending to buyers with foreign incomes, aimed mainly at Chinese investors, and also the more rigorous requirements now being imposed by the local banks on mortgage borrowers generally.
“There are signs that some settlements are taking longer and lending valuations are coming in below their contract price, though settlement failures to date remain low,” the bank noted.
The Reserve Bank’s concerns were shared by the banking regulator, the Australian Prudential Regulation Authority.