Property investor losses soar as market slumps, costs rise and sentiment sours


For example, more than 76 per cent of recent first-time borrowers would be underwater – that is, face negative equity. Worst hit would be the Australian Capital Territory and Perth. More than eight in 10 borrowers aged under 40 would also have more debt, than equity, in their property.

Record numbers of apartments nearing completion in Melbourne, Sydney and Perth, combined with accelerating deterioration in sentiment and tougher financing, mean demand is likely to weaken and prices continue to fall in the nation’s prime property markets, it shows.

The number of apartments being sold at a loss around the country is hitting 20-year highs before taking account of rates, mortgage costs, stamp duty and banking and legal fees.

A 20 per cent fall from current values would cause about 40 per cent of households to fall into negative equity, which happens when the market value of a property falls below the outstanding amount of a mortgage secured on it, according to DFA research.

“The risk of a crash cannot be ignored, given the danger that banks may overreact and become too tight and that investors decide to exit,” according to Shane Oliver, AMP Capital chief economist, who predicts a boom-to-bust 20 per cent fall in Sydney prices.

 

A sharp slowdown in property prices is likely to hit consumer confidence, weaken property auction clearance rates and slow economic growth, according to economists.

It also will put property developer profits under pressure, could cause lenders to adjust to mark-to-market valuations and increase claims from mortgage lender insurance.

“Lending standards are now a lot tighter,” said Martin North, principal of Digital Finance Analytics, a finance consultancy. “Rising losses show that they were too loose.”

But Melos Sulicich, chief executive of listed lender MyState, played down the possibility of any systemic risk from falling prices, claiming most owner-occupiers had taken advantage of low mortgage rates to get ahead of repayments and create a buffer against worsening market conditions.

“Falling prices are unfortunate but do not mean a lot unless you are unemployed,” Mr Sulicich said.

Lenders continue to make lucrative offers to first-time borrowers, or those seeking to refinance, who meet their strict new lending criteria with low rates and cash incentives to cover loan set up costs.

For example, HSBC Australia is reducing variable and fixed interest rates on owner-occupied and investment home loans by up to 66 basis points. Its loan for owner-occupied, principal and interest borrowers is down by 5 basis points to 3.59 per cent.

“The fundamentals in the housing market remain strong,” said Alice Del Vecchio, head of mortgages. “They are being driven by strong jobs growth, a rising population and historic low interest rates.”

Opportunity in falling prices

Sam Saliba, a company director who has eight properties in his portfolio, said falling prices created opportunities, despite his having recently lost money on an off-the-plan purchase he describes as a “mistake”.

Mr Saliba is considering selling five properties in Hobart, where prices are still rising, and another in Albury to take advantage of lower prices in Sydney, which until the slowdown were too expensive.

“I see this as an opportunity,” Mr Saliba said. “A lot of people are going to have to start refinancing and there are going to be fewer buyers at auctions. I’ll wait until after Christmas and then I’m going to pounce.”

Losses and volatility are worsening as the market responds to tightening bank lending, interest-only borrowers switching to principal and interest, a cutback in foreign demand, out-of-cycle rate increases, falling prices and expectations that negative gearing and capital gains tax concessions will be made less favourable.

In addition, a near-record 270,000 dwellings under construction – of which about 70 per cent are apartments, primarily in Melbourne and Sydney – is increasing the risk that off-the-plan property buyers might not be able to settle.

“Many of these apartments would have been sold off the plan,” said Mr Lawless. “This was at a time when housing conditions were much stronger and credit conditions were not as tight. With so many units in the pipeline at a time when overall housing market conditions are weakening, settlement risk is heightened.”

Off-the-plan deals work well for buyers in rising markets because they can lock in the purchase price. But those who put down a deposit before the current downturn will have to absorb market losses, or sell.

Buyers who cannot settle will likely lose their deposit and could be sued for any costs, including the difference between the contract price and ultimate selling prices.



Source link Finance News Australia

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