Is now the right time to buy an off-the-plan apartment in Sydney?

Introduction

Why aren't the prices of off-the-plan apartments falling, like the prices of mobile phones have fallen, when so many are under construction in Sydney?

Mobile phones once looked like bricks – they were clunky and were very expensive. But improved technology and design has made mobiles wafer thin style icons, and increased supply has made mobiles cheap to buy.

It's almost the same with new home units / apartments. Once they were boxy with tiny little balconies. Now they are sleek and designed for today's lifestyle. But why do new apartment prices remain so high with so many new apartments being built? It is common to pay $650,000 for a standard one bedroom apartment and $950,000 for a standard two bedroom apartment to buy off-the-plan in inner Sydney.

For home buyers and property investors, the question is: do you buy a new apartment in Sydney now off-the-plan because you are afraid that apartment prices will keep rising due to increased demand; or do you wait until the increased supply of apartments under construction floods the market leads to falling prices?

As the economists say, will the new apartment market in Sydney continue to be a story of demand exceeding supply, or is this a speculative property price bubble which will burst when a glut of new apartments comes on stream?

If I told you that only 36% of the 27,276 apartments to be constructed in Green Square - which is an area between Alexandria and Moore Park in South Sydney - have been completed, would that not indicate a looming oversupply of apartments being constructed in Green Square? And when the remaining 17,450 apartments are completed, will that not flood the rental and re-sale markets and cause rents and prices to fall?

Green Square is the largest, but not the only cluster of high density high rise apartment building projects in Sydney under construction - there are projects in suburbs such as Turrella, Zetland, Waterloo and Mascot near the airport, and at Ryde (Putney Hill), Lane Cove, Chatswood, North Sydney, Central Park and Forest Lodge close to the Sydney CBD.

How long will the current Sydney property boom last?

The large number of cranes on the Sydney skyline is proof positive that the construction of apartments is at boom-time levels and will continue that way in 2015 and into 2016. In other words, the supply is continuing and relentless because of the boom in construction is locked in - it cannot be stopped this year or the next.

The unknown is: how long the buying demand will continue? Sooner or later, the demand will fall away. What will trigger the fall in demand that bursts the property price bubble is anyone's guess.

The trigger could be a rise in unemployment, or a credit squeeze with high interest rates, or a financial crisis in China, Europe or the US, or an armed conflict overseas, or high vacancy rates because there are too many apartments and not enough tenants, or because loan valuations are below the contract price, or because banks decide to change their lending rules for buyers and lend only 65% of the price instead of 80% or 90%.

What will be the effects on Purchase Contracts when the property price bubble bursts?

Buyers who have signed Purchase Contracts pre-construction, and who see property prices fall during the construction period may want to weigh up their position. They will carefully examine the quality of the Purchase Contract, and whether or not the marketing representations made to induce the purchase are actionable as false and misleading, to see if they can terminate or renegotiate the Purchase Contract.

Some buyers will not be able to borrow enough to complete, and default. Normally, the property developer will terminate the Purchase Contract, forfeit the 10% deposit paid, and re-sell. But that adds to the oversupply of properties, and depresses the market. The smarter option for those property developers might be to avoid loss by offering ‘top-up’ finance, which is a form of vendor finance. This will result in 10% to 25% of the price being received later. But it’s better to receive the money late than not at all!

Conclusion

I saw the booms in home unit construction followed by the busts happen in 1971-1975 and again in 1987-1991. Both booms and busts followed mining booms and busts. The price falls in property are real when they come, just like the price falls in iron ore and coal are real.

The right time to start buying new apartments will be about 6 months after the bubble bursts and buying opportunities will continue for two years or more. The former off-the-plan apartments are likely to be much cheaper - re-selling at price discounts of up to 30%.

This time, tracking the buying opportunities will be different because of technology. Buyers will be able to keep tabs on the property market on smartphones, and sms their offers to buy properties at a discount.

Note: This article was first published by Cordato Partners in Lexology which is an international innovative, web-based service that provides over 250,000 company law departments and law firms around the world with a depth of free practical know-how on specialist areas of law © Copyright 2015 Sydney