Over recent years we have seen an unprecedented number of units approved for construction. This is self-evident by observing the cranes dominating many of our capital city skylines.
There are several factors creating an increased demand for units. These include:
- An attractive price point (units tend to be much cheaper than houses);
- Greater demand for inner city living reflecting the changing demographics;
- Increasing demand for Australian property from overseas investors; and
- Government planning initiatives aimed at increasing high density living along the major transport spines.
Whilst demand for unit stock has undoubtedly increased, there are concerns that new supply has effectively overshot the mark in particular geographic locations, increasing concerns around the risk attached to some projects currently under construction.
Connected to this oversupply risk, concern is growing that pre-settlement valuations may come in much lower than the actual contract price for some off-the plan unit sales and, as a consequence, a proportion of the contracted sales won’t proceed to settlement.
There are a number of reasons why an increasing settlement risk exists for units:
- The level of new unit construction is currently at unprecedented levels, with a record-high number of settlements due over the next two years.
- In many regions, capital growth has been substantially lower for units than for houses. Many off-the-plan unit buyers would have expected a higher level of capital growth between exchange of contract and settlement, which in many cases has not eventuated.
- Mortgage lenders have tightened their lending criteria and some have a reduced risk appetite to investors, impacting on the availability of finance to complete these purchases.
- There is a strong degree of geographic concentration of new unit stock, particularly in Melbourne and Brisbane, which will compete with existing unit stock.
- Three of the four major banks have recently announced more restrictive lending policies to non-resident borrowers, which is potentially significant given a material proportion of off the plan unit sales are to overseas buyers.
It is incumbent on the property and mortgage finance industries to manage this risk in a proactive manner to ensure consumers are not ‘blind-sided’ and that any downside risk is mitigated to the greatest extent practicable.
Sydney and Melbourne predictably have the greatest number of expected unit settlements over the coming 24 months. When you compare the number of new units set to settle compared to average unit sales over the past 5 years you can see there is a substantial disconnect. Particularly when you consider the market does not only consist of new unit sales but also resales.
With the mortgage market changed over recent years and unprecedented levels of unit settlements set to occur, it is going to be a challenge for all of these units to successfully settle. Moreover, given value growth is expected to slow it will be interesting to see if and how these units maintain their value.
For more information on Settlement Risk click here.