In recent times there has been repeated warnings of the dangers of buying off the plan in high-rise residential buildings. An excellent article in The Australian newspaper last week highlights a very real problem that exists. Below are extracts from the article.

Source: Chinese Home Buyers Caught In a Trap by Maggie Lu Yueyang – The Australian Aug 8th, 2016:

As a renowned teacher of English in China, Liu Jiabing planned well for his daughter’s education. He chose a good university in Australia, helped her to get an offer to enrol next year, and bought an apartment in Melbourne that is due to settle next month.

But now the apartment near Monash University that he bought off the plan for $600,000 is keeping him up at night.

“At the very first, I was told I only had to pay 20 per cent down payment,’’ Mr Liu, who works at a prestige foreign language school in Nanjing, in China’s east, told The Australian in a phone interview. “Then they told me I had to pay 30 per cent, and later 40 per cent, as the banks won’t lend and we have to borrow from small financial organisations”.

Mr Liu is just one of those Chinese parents who buy homes, usually new apartments, before sending their children to Australian universities.

Education is the top motivation for Chinese buyers of properties here, driving more than 60 per cent of inquiries in Sydney and Melbourne, according to Juwai, an international property portal for Chinese buyers.

However, these buyers are now struggling to settle their purchases after all the big banks shut down lending to overseas buyers. They may have to pay in cash, resell at a loss or simply lose the 10 per cent deposit.

The extent of the impact on Australia’s property market remains unclear, but could be severe given that overseas buyers comprise about 30 per cent of the new apartment market. At some individual projects, the portion can be 50 per cent or even 100 per cent, according to industry experts.

While Mr Liu sets about finding the money from friends and families to help make the down-payment, AC Property, a Melbourne-based property portal, has four or five calls every day from buyers who seek to resell their off-the-plan apartments after finding it hard to settle.”

In another part of the article the following story is typical of many buyers and not those necessarily from overseas.

Mr Li, who declined to give his first name, is one of those resellers after the Melbourne CBD apartment his parents bought two years ago failed to settle.

“Everything looked fine when my parents bought it two years ago, and we were told they could get bank finance as overseas buyers,” said Mr Li, a sales representative in the telco industry.

“But now they could not get finance and could not settle.”

Mr Li’s parents, based in Guangzhou, in China’s south, have already missed the settlement deadline of July 18 for the apartment they bought for $440,000. The developer is now charging them about $150 a day as penalty, which is pushing Mr Li to resell as soon as possible.

“It’s OK if we can just get back 5 per cent, but we haven’t got any buyer yet,” he said.

Even if they could get finance, it would not be ideal to hold the property in the current market, Mr Li added, showing concerns about the limited profit upside.

“If we walk away, the worst thing is that we lose the 10 per cent deposit. But if we find ways to ¬settle it, I am not sure what we can make out of this, as the market is not looking pretty.”

We believe this is becoming quite a common occurrence in Melbourne. Some vendors have tried to sell prior to settlement but failed and were forced to settle after finding more equity because the bank valuation at settlement was well below the original price paid.

In our view this scenario will be repeated many times because there is a surplus of apartments and with forced selling, prices (valuations) will drop as those unable to settle will sell at less than the original contract price paid off the plan. Our advice is to stay away from high-rise, off the plan, purchases.