This is a new term you’ll unfortunately start hearing a little more often.

A neighbouring agent who has been selling a lot of new projects talked to me the other day. He told me he had received a phone call from a developer of a large block of units which had just been finished and was now going through settlement with the new buyers. All the buyers had bought off the plan a couple of years before. Of all the units, 38 had been sold to buyers who lived overseas. Nothing unusual there.

The problem for the developer was that every overseas buyer defaulted on their purchase.  

And the only reason that happens is that each unit is worth a lot less now compared to when contracts were exchanged. Overseas buyers can pull out and not get sued whereas resident buyers aren’t so lucky. The banks aren’t taking risks. Many of the local buyers would be struggling to get the money to cover the shortfall between what the bank would now lend and what they owe the developer.

And with all 38 properties coming back on the market, the value of those units will crash.

Volume is the enemy of price. The more supply, the less the value and that is more bad news for the buyers who are struggling to get their loans through.

My agent friend told me he used to sell 30-40 units each month through his project sales. Now he says a good month is 2-3 units.

RPData has told us that 30% of ‘off the plan’ sales in Sydney are being valued by the banks at less than the contract prices they were bought for by buyers. 30% is double compared to last year. Banks will only lend up to 90% of valuation and on a lot of these off the plan sales they are being even more conservative lending only up to 80%. They know the value of these units will fall harshly and want to be sure they don’t have mortgages that are more than what the properties eventually bottom out at.

In our council area there are a lot of blocks of units to still be completed and settled. There are going to be a lot of buyers and developers knowing all too well what settlement risk looks like and feels like. Developers if they can’t get all their units sold and settled could very well be made bankrupt by the banks.

This will end in a lot of tears I’m afraid.

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