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Economists warn of rising risks for off-the-plan market

Australia’s leading economists have expressed their fears for off-the-plan property following speculation that a default crisis could be on the horizon.

The Reserve Bank of Australia warned in its Financial Stability Review for October that settlement risk on apartments purchased off-the-plan may have increased as a direct result of the stricter criteria that banks are now applying to investor housing loans.

This was backed up by Century 21 Australia chairman Charles Tarbey, who told Mortgage Business that a serious default issue could be on the horizon for the thousands of Australians buying off-the-plan properties.

AMP Capital chief economist Shane Oliver agrees with both the RBA and Mr Tarbey that there is a risk of default.

“I think the main concern is that investors who bought off-the-plan sometime in the last six months, obviously with the view of making their final payment once the building is completed, may find that when they go to their bank or any bank that they end up struggling to get the finance,” Mr Oliver told Mortgage Business.

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Mr Oliver pointed out that the environment has become a lot tougher in the last few months, with the regulatory pressures placed on banks having broader implications for property developers.

“Particularly around the middle of the year we saw a range of tightening measures introduced by the banks in response to pressures from APRA designed to slow down the rate of growth in lending to investors,” he said. “Obviously if the investors who bought off-the-plan can’t get the financing then they default on their commitment, which then creates problems with the developer and you end up with a broader problem.”

Mr Oliver believes the main market segment that will be affected is owner-occupiers who have decided to undertake their first investment.

Meanwhile, HSBC Bank Australia chief economist Paul Bloxham said strong sales of off-the-plan properties are often a tell-tale sign of “exuberance” in the housing market.

“When things cool a bit, as they have done recently, this can often leave some off-the-plan purchasers a bit stretched,” he said.

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“The apartment markets in Melbourne and Brisbane look to be the two most supplied markets, with some risk of oversupply.”

However, Domain Group senior economist Andrew Wilson said he is “reasonably confident” that there won’t be any significant imbalances in the market place.

“We’ve really never had a significant history of mortgage defaults in this country,” he said.

“The key catalyst for that is the economy, and that’s higher unemployment, which obviously constrains people’s capacity to repay mortgages.”

Mr Wilson said while off-the-plan properties present some risk elements, this is just part of the normal cycle.

“The prospects of oversupply and the risk of defaults as a result of that, I think, are minimal, particularly in Sydney,” he said.

“Some of the issues lately, given higher demand, is developers have tried to modify their product through the clauses in the contract which has obviously caused some angst to some buyers but that’s just a sign of the cycle.”

[Related: Default crisis looms for off-the-plan buyers]

Economists warn of rising risks for off-the-plan market
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