As many as one in four buyers of housing lots in Melbourne are defaulting on their purchases, according to the country’s biggest land developer.
Speaking to Your Money Live, mortgage broker and financial adviser Chris Bates of Wealthful, commented on reports that at least one property developer is seeing between 20 to 25 per cent of all land purchases in Melbourne lots default.
That figure, while large, isn’t so shocking for those familiar with the downturns in both Melbourne and Sydney.
“Defaults don’t surprise me at all because when you purchase land in advance of settlement you’re really taking a punt on what that property is going to be worth when it settles,” told Your Money Live.
However, while some land parcels in Melbourne’s outer suburbs saw surges of up to 50 per cent in value a few years ago, the market has since turned meaning such gambles were fruitless.
“They might be defaulting because they don’t want to go through with the purchase because it doesn’t make sense anymore or they couldn’t get finance,” Bates said.
The second group have been stung if having paid their deposit, they’ve been denied loans on the back of tightened lending standards.
“A lot of families now won’t be able to get the finance they thought they could one or two years ago.”
It’s a trend that is unlikely to remain contained there either, Bates warned.
Tightened credit combined with slowing house prices in Sydney and Melbourne means a new wave of defaults could be about to hit those who bought off-the-plan units.
“I’ve heard a lot about it in the off-the-plan space and I think that in 2019 and 2020 we’re going to hear a lot about it because without a doubt the unit prices that were sold in ’16 and ’17 [are] nowhere near that now,” Bates said.
While previously a default may have only cost you your deposit, the risks are actually far higher than most people think.
“If you can’t settle, you’ve signed an unconditional contract. In the past, the developer would say, ‘that’s ok, we’ll take your deposit and we’ll resell it and we’ll make money because the market has gone up’,” Bates said.
However, with the market going down, developers face a real danger of making substantial losses meaning they are less inclined to allow buyers to walk away so easily.
“What they can do is chase you for that loss, chase you for all the selling costs, and charge you default interest until they find another buyer,” Bates explained.
Watch the full interview above.