Most off-the-plan apartments worth less than they’re sold for: Report

A new report has revealed that a startling majority of people who buy apartments off-the-plan in Australia’s major capital cities could be heading immediately into negative equity, as the properties are actually valued lower than the agreed purchase price upon completion.

New data from CoreLogic, as reported by the ABC’s 7.30 program, revealed that 60 per cent of off-the-plan apartments in Sydney wind up being worth less once they are completed than the price they were sold for. While the same can be said for 52.9 per cent of off-the-plan apartments in Melbourne.

The figures showed that in August this year, close to a third of off-the-plan buyers in the NSW capital were moving into newly-built apartments that were actually worth at least 10 per cent less than the contract price. However, just two-years ago, the figure was less than 16 per cent.

In other states, the figures were far lower with the report revealing that just 43 per cent of off-the-plan buyers in Queensland bought units that were valued lower during settlement than the purchase price, while in Western Australia, the number was far lower at just 22.5 per cent of apartments.

CoreLogic’s head of research, Tim Lawless told the program: “We were seeing values rising at about 15 to 20 per cent per annum in Sydney and Melbourne. Now cast your mind forward to 2019 and we’ve seen prices come down in Sydney by 15 per cent. In Melbourne, they’re down by about 11 per cent.

“A lot of those off-the-plan buyers have seen a very fundamental shift in the value of the project that they purchased a couple of years ago.”

What is buying off-the-plan?

When you buy off-the-plan it means you are signing a contract to purchase a property that has not yet been built. This means that unlike traditional property sales, there is no physical building for you to inspect, so your decision instead has to be based on drawings and details provided by the developer. But is this a good, or bad, idea?

Pros and cons of buying off-the-plan

Perhaps the biggest pro to buying off-plan is that you will usually pay less for the property if you buy it in this way. The reason being that you will have agreed upon a purchase price with the developer before the building has been completed, meaning you could pay far less for the unit than it will actually be worth upon completion due to rising property prices. Buying off-the-plan will also often yield a lower deposit amount, with some developers offering rates as low as five or 10 per cent. This can make a huge difference to you as a buyer, as it gives you more time to get your finances in order before paying the balance.

Another financial upside is that the amount of stamp duty you are required to pay will be lower for properties bought off-the-plan. This is due to the fact that stamp duty will be paid for the land value, rather than the value of the finished property.

And finally, because the property is brand new and has never been lived in, chances are it will be in better condition than the majority of older homes on the market. This in turn will reduce the amount of cash you’re likely to need to shell out to have the place looking its best. New properties are also usually more energy-efficient than older houses and units too, which could also slash the cost of your utility bills. While you may also have the chance to personalise your home and have a say in the style and colour of the decor fitted, saving you time and money further down the track.

However there are some factors you should be aware of before you agree to buy a property off-the-plan. While we cited the pre-agreed purchase price as a benefit above, it is also true that this could turn out to be a potential problem. For example, if house prices across Australia plummet, then you could end up having paid a lot more than the property is worth upon completion – which is precisely what CoreLogic‘s new data has revealed.

Others risks to be aware of involve the building developer, so it really pays to do some research about the company before agreeing to purchase one of their off-plan properties. This can include simply Googling them, reading reviews, checking out their website and looking for any bad news reports about previous business.