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BFCSA: Off-the-plan apartments bomb for investors

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Off-the-plan apartments bomb for investors

Australian Financial Review Apr 4, 2019 4.23pm

Duncan Hughes


Two out of three Melbourne apartments sold off the plan during the past eight years have made no price gains, or have lost money upon resale, despite a property boom and record immigration, according to analysis by BIS Oxford Economics.

In Brisbane about half are selling at a loss, or no profit, over the same period, while for Sydney it is about one in four since 2015, the analysis reveals.

Numbers of properties losing money are rising as the slump in prices, a slowdown in overseas buyers and fears grow about the dangers of living in high rise because of negligent construction, particularly the use of inflammable cladding.

Nervous lenders are also demanding a bigger deposit from buyers, which means buyers routinely having to pay more before the purchase can be completed.

Property investors and BIS are warning proposed changes to negative gearing proposed by the Labor federal opposition are likely to worsen the problem, particularly for pipeline projects still being completed.

Angie Zigomanis, associate director for BIS, said: “The removal of negative gearing benefits from established dwellings and quarantining it to new dwellings will further reduce the value of established dwelling related to new dwellings and is likely to exacerbate resale losses.”

Property Investors Council of Australia chief executive Ben Kingsley, which represents property investors, said the proposed changes could backfire on a future Labor government attempting to encourage more building by discouraging new investors.

Mr Kingsley said OTP buyers already pay a premium to purchase their properties, so removal of negative gearing is likely require a bigger premium for the seller that buyers might not be willing to pay.

Over fiscal 2018, 98,000 apartments were completed across the country and 65,000 in NSW alone, according to ABS figures.

Buying off the plan involves purchasing prior to construction starting. The process is very popular during bull markets when rising prices mean the property is more valuable at end of completion.

But the reverse often happens in bear conditions.

Mr Zigomanis said OTP apartment prices are priced at a premium because they are new, as well as having negative gearing tax benefits, incentives and state government first time home buyer incentives.

“This has resulted in more limited upside in price growth for the first resale,” he said.

Sales with a three to five kilometre radius of central Sydney, Melbourne and Brisbane have realised consistently lower prices than established apartment resales, according to BIS research.

Melbourne, which has the highest supply of inner-city apartments, has also posted the biggest losses. There has also been apartment building booms around Sydney and Brisbane.

Brisbane's inner-city apartment market has about 10,000 more homes in the pipeline than it should, says property research outfit RiskWise, and the city is expected to face more defaults on settlement.

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