Buying off the plan
There are advantages to buying a property off the plan. In some states it has been encouraged by the state government. For example the NSW government’s waiving of stamp duty costs for people buying off-the-plan dwellings of under $600,000 has contributed to an increased amount of buyer interest in residential developments in Sydney.
On this scale the incentives are significant. The stamp duty waiver has handed buyers a potential saving of $22,490. Buying off the plan has become a kind of sub market of the property market and as such can move independently of other sectors of the market. It is also geographically centric – such as Melbourne’s Docklands as well and Sydney’s Alexandria and other inner city location in the period 2001-2003 and now, more recently including Brisbane’s famous Woolstores and the inner city suburbs of Sydney such as Pyrmont and Camperdown, are proving highly sought after.
In the peak of a market cycle demand for off-the-plan apartments and villas is high because there is competition from investors and owner occupiers. The investor mindset is: if I buy off the plan on a deposit I will be building equity from the time I pay a deposit to the time the project is complete and I need to settle. Leading up to a peak in market cycle, buyers are encouraged by the fact that market prices are appreciating.
Also a developer can “play off” the demand caused by early buyers, thus enabling developers to market off the fact that the remaining properties in a project attain a “scarcity” factor.
One of the challenges facing developer in all markets is the availability of finance. Financiers now expect pre-sales rates of 75% before extending construction finance, whereas this time two years ago, it would have been 50% or even 40%. One of the attractions to buyers is that bank finance will favour people with good income and credit record and who have the pre-requisite deposit.
Note that valuation and borrower assessments have become considerably more robust since the sub prime crisis has hit. Banks are applying more due diligence in their valuation on off-the-plan property. The impact of this on developers has been noted, but for investors it means that they will more likely to look closely at price considerations against similar existing stock in the location.
However, the period of time between putting down a deposit and final settlement (upon completion of the building) is often up to 18 months and this can give some lenders a ‘comfort’ gap in terms of measuring the risk in mortgage finance. In a similar fashion if, a mortgage holder is looking to refinance their mortgage with a view to take an investment position in an off-the-plan purchase then this too offers some advantage to the mortgage holder.
Whereas buyers once had the capacity to buy on a small deposit – even deploying deposit bonds – these days lending conditions have changed and require a buyer to have considerable deposit to buy off the plan or seek to refinance an existing mortgage to release some equity.