Conservative valuations could trigger ‘serious default issue’

The head of a national real estate group fears that a serious default issue is on the horizon for Australians who have snapped up off-the-plan properties.

Century 21 chairman Charles Tarbey said off-the-plan properties may not come up to their contract value upon completion, as valuers become more conservative in an environment of increasing risk.

“Valuers were the ones who were absolutely destroyed during the GFC, whereby people purchased property, the price of property fell through the floor and people sued the valuers because of the advice they had given on valuations,” Mr Tarbey told REB.

“At this point in time I would think that valuers are going to start revisiting the pain they felt all those years ago and they are going to become more conservative in the way that they value properties.

“If that’s the case, and we look at properties coming in off-the-plan, they may not value up to what the contract prices were, which could indicate a serious default issue looming for a number of people.”

Mr Tarbey warned that off-the-plan buyers might not be able to meet the valuation requirements unless they have extra cash.

But even if they can, their loan-to-valuation ratio might change in such a way as to force them to take out mortgage insurance.

Mr Tarbey highlighted that a significant number of people could be exposed to this risk given the rate at which off-the-plan homes were snapped up in boom markets over the past year.

“Some haven’t even started to come out of the ground yet – it could be two years away,” he said, adding that a lot can change in that time.

“A property in Penrith [Sydney] that was $300,000 two years ago, is now selling for $700,000. It could just as easily go the other way, particularly if interest rates climb,” he said.

“In 24 months’ time, if you've based everything on your salary today and the interest payments today, and the interest rates go from 4.5 per cent to 6 per cent, and the valuation comes down from 100 per cent of what you purchased it for to 90 per cent of what you purchased it for, there could be a very serious issue looming.”

AMP Capital chief economist Shane Oliver told REB’s sister title, SMSF Adviser, that off-the-plan investors could even struggle to qualify for mortgages once developments are built.

“There is the risk that investors who have bought property off-the-plan from developers may find that once the time comes to get the finance as the building is complete, that there could be problems, as they can’t then get the investment finance from banks,” he said.

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