The looming crises in the property market, and what it means for buyers

A look at property as a long-term investment, and what it means to buy off the plan in the current market.

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Property is considered to be a long-term investment. A general consensus is that given time, in any structured growth investment, one comes out on the positive side of the ledger.

The Australian property market enjoyed an unprecedented boom between 2012 and 2017, when prices soared by over 72% in Sydney and 56% in Melbourne. This growth, however, was not evenly spread, with states in the eastern seaboard experiencing the best returns, whereas Western Australia and Queensland property values actually went the other way.

Property market.Indian Link

For new migrants coming to Australia in the last five-six years, prior to 2017, property boom was the order of the day. Upon migration, which has its own set of anxieties, there was also the added pressure to get into the property market, or risk missing out on ever owning a property in Australia, especially in Sydney and Melbourne. The media didn’t help either, with screaming headlines of sales far above reserve prices. When financial decisions are made with emotion and under peer pressure, rather than with seasoned and rational thought, it can bring on disaster.

Those who are most exposed to the falling property market are those who bought off the plan and are expecting a settlement in the next couple of years. Buying off the plan is a strategy akin to a double-edged sword. In a rising market, locking in a future price works well; but if the market has fallen, it can lead to a financial disaster.

Buying off the plan means putting a small, agreed deposit to purchase a property at a future time at a predetermined value. Builders like this strategy, as it secures a sale; for astute buyers, they can plan their cash flow around what they expect to buy in the future. The only variable is the bank who will review their lending based on the property value at the time of settlement.

Shane Oliver, a respected economist, has predicted a 25% drop in the property values from the peak of 2017. He says this will wind the clock back to the levels of 2014-15 property prices. He has also cited research that the Labor Party’s proposed changes to negative gearing can further depress property prices by another 9% in Sydney.

For those who have bought off the plan in the last year, the problem with lower valuations is that at the time of settlement, the lending banks may reconsider their earlier commitment and only agree to fund their lending based on the lower property value. This could put pressure on the new buyer to either front up with an additional lump sum or potentially sell the property at a substantial loss. Neither option is particularly palatable.

For cashed-up buyers, this vulnerability of the off-the-plan buyer and their exposure creates good opportunities to buy quality long-term assets at depressed prices.

Like in life, there are always winners and losers in any transaction.