Is now the right time to
buy an off-the-plan apartment in Sydney?
Why aren't the prices of
off-the-plan apartments falling, like the prices of mobile
phones have fallen, when so many are under construction in
Mobile phones once looked like bricks – they were clunky
and were very expensive. But improved technology and design
has made mobiles wafer thin style icons, and increased
supply has made mobiles cheap to buy.
It's almost the same with new home units / apartments.
Once they were boxy with tiny little balconies. Now they are
sleek and designed for today's lifestyle. But why do new
apartment prices remain so high with so many new apartments
being built? It is common to pay $650,000 for a standard one
bedroom apartment and $950,000 for a standard two bedroom
apartment to buy off-the-plan in inner Sydney.
For home buyers and property investors, the question is:
do you buy a new apartment in Sydney now off-the-plan
because you are afraid that apartment prices will keep
rising due to increased demand; or do you wait until the
increased supply of apartments under construction floods the
market leads to falling prices?
As the economists say, will the new apartment market in
Sydney continue to be a story of demand exceeding supply, or
is this a speculative property price bubble which will burst
when a glut of new apartments comes on stream?
If I told you that only 36% of the 27,276 apartments to
be constructed in Green Square - which is an area between
Alexandria and Moore Park in South Sydney - have been
completed, would that not indicate a looming oversupply of
apartments being constructed in Green Square? And when the
remaining 17,450 apartments are completed, will that not
flood the rental and re-sale markets and cause rents and
prices to fall?
Green Square is the largest, but not the only cluster of
high density high rise apartment building projects in Sydney
under construction - there are projects in suburbs such as
Turrella, Zetland, Waterloo and Mascot near the airport, and
at Ryde (Putney Hill), Lane Cove, Chatswood, North Sydney,
Central Park and Forest Lodge close to the Sydney CBD.
How long will the current
Sydney property boom last?
The large number of cranes on the Sydney skyline is proof
positive that the construction of apartments is at boom-time
levels and will continue that way in 2015 and into 2016. In
other words, the supply is continuing and relentless because
of the boom in construction is locked in - it cannot be
stopped this year or the next.
The unknown is: how long the buying demand will continue?
Sooner or later, the demand will fall away. What will
trigger the fall in demand that bursts the property price
bubble is anyone's guess.
The trigger could be a rise in unemployment, or a credit
squeeze with high interest rates, or a financial crisis in
China, Europe or the US, or an armed conflict overseas, or
high vacancy rates because there are too many apartments and
not enough tenants, or because loan valuations are below the
contract price, or because banks decide to change their
lending rules for buyers and lend only 65% of the price
instead of 80% or 90%.
What will be the effects on
Purchase Contracts when the property price bubble bursts?
Buyers who have signed Purchase Contracts
pre-construction, and who see property prices fall during
the construction period may want to weigh up their position.
They will carefully examine the quality of the Purchase
Contract, and whether or not the marketing representations
made to induce the purchase are actionable as false and
misleading, to see if they can terminate or renegotiate the
Some buyers will not be able to borrow enough to
complete, and default. Normally, the property developer will
terminate the Purchase Contract, forfeit the 10% deposit
paid, and re-sell. But that adds to the oversupply of
properties, and depresses the market. The smarter option for
those property developers might be to avoid loss by offering
‘top-up’ finance, which is a form of vendor finance. This
will result in 10% to 25% of the price being received later.
But it’s better to receive the money late than not at all!
I saw the booms in home unit construction followed by the
busts happen in 1971-1975 and again in 1987-1991. Both booms
and busts followed mining booms and busts. The price falls
in property are real when they come, just like the price
falls in iron ore and coal are real.
The right time to start buying new apartments will be
about 6 months after the bubble bursts and buying
opportunities will continue for two years or more. The
former off-the-plan apartments are likely to be much cheaper
- re-selling at price discounts of up to 30%.
This time, tracking the buying opportunities will be
different because of technology. Buyers will be able to keep
tabs on the property market on smartphones, and sms their
offers to buy properties at a discount.
Note: This article was first published by Cordato
Partners in Lexology which is an international innovative,
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Copyright 2015 Sydney