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Leading economists have expressed their fears for off-the-plan property following speculation that a default crisis could be on the horizon.
AMP Capital chief economist Shane Oliver backed up recent statements from both Century 21 chairman Charles Tarbey and the Reserve Bank that buyers of off-the-plan apartments might struggle to repay their mortgages.
“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 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 said 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.
“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 [...] 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.”
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