With developers spending thousands of dollars on marketing to attract buyers why are sales becoming more difficult and why the days of 100% pre-sales seem to be gone? Here we dive into the world of finance to take a look at some of the big issues holding things back, what’s to come in the future and how you can stay one step ahead.
Over the last 24 months we have seen huge changes in the mortgage and finance industry as well as the consumer’s attitude towards buying off plan. All of these “little” changes combined have caused a big knock-on effect to the developer’s bottom line.
While driving around Brisbane it’s becoming ever more common to see new developments completed with ‘For Sale’ signs out the front and half the units still empty. For developers this has caused huge financial issues restricting cash flow, preventing future developments and having to take out additional construction loans from 3rd tier lenders or private firms. For those who are unable to service additional loans times have become very difficult with many developers calling it a day and shutting the doors. Some of the key industry changes that have caused this are:
1. Just over 18 months ago we saw Foreign Investors frozen out of the market from both Australian and Asian Governments. This was one of the key elements causing the market to change as a large percentage of investor buyers where overseas. Although the Australian Government still allows for foreign investors to buy property they are restricted to new stock only and face additional fee’s and red tape. The Asian Governments however are restricting the amount of money that can leave the country making it very difficult for these investors to buy investment properties abroad.
2. With the oversupply of units in full swing Lenders started to panic as they watched rents drop, vacancy rates rise and sales prices on the downtrend. This caused lenders to become very conservative with valuations coming in up to 5% less than the purchase price. This caused big problems as it the purchaser now has to fund the shortfall which often caused the contract to crash resulting in no sale.
3. If the conservative valuations weren’t bad enough Lenders started to Black Listed suburbs where oversupply of developments where happening. This means once the suburb made it onto the Lenders Black List they will no longer offer finance to any prospective purchaser regards of their deposit size. This results in the purchaser having to use alternative finance methods which often come with higher rates and additional fee’s putting them off.
4. Shortly after this the Finance and Mortgage world became under the spotlight as the Government launched a Royal Commission to investigate Misconduct in the Banking, Superannuation and Financial Service industries. During this time Lenders tightened their belts and kept a very conservative approach resulting in loan approvals dropping and again making it harder for investors to get loans.
5. As a result of the Royal Commission Lenders tightened their responsible lending policies increasing the amount of surplus funds a borrower has to have after all bills and monthly expenses are paid. This had a dramatic effect on how much investors could now borrow, again restricting the amount of funds available to the investor.
6. Interest Only loans are now reviewed every 5 years with Lenders very reluctant to grant a new 5 year Interest Only period without a very strong reason. This is causing investors to rethink their next purchase as they see their current repayments rise as they are forced in P&I loans.
7. Self Managed Super Fund (SMSF) reforms and a crackdown on how Financial Planners receive commissions have made it a lot harder to purchase property in your Super resulting in a large drop in sales.
Things to watch in the future
You may or may not have heard about ‘Open Banking’ and ‘Comprehensive Credit Reporting’ but these could set to again block access to credit for investors.
So what is Open Banking – In short all your financial history with a lender will now be shared among licensed credit providers starting with the Big Four banks (ANZ, CBA, Westpac and NAB). This will be rolling out across the industry to all licensed credit providers by 2022.
When you apply for a line of credit with one of these lenders they will be able to see your whole financial history instead of a 3 month snap shot sent with your application. With this data they will be drilling down and assessing how financially educated and how much of a risk you are. This again will make it harder for people to get access to credit resulting in less buyers in the market.
Comprehensive Credit Reporting – This will see a big change to your current credit report and the information available on it. Similar to the Open Banking this now captures all your financial transactions over the last 24 months and and gives you a score from 0-1000 based on how financially savvy you’ve been. Missed, late payments, loan applications, lease applications, credit cards, repayment habits, Zip pay, payday loans as well as a multitude of other information will make up your score. A score below 600 will start to cause you problems as most mainstream lenders will no longer lend to you.
Over time this will get more comprehensive and we will see all your home utility and mobile phone bills included in the one document, uncovering any skeletons you may have.
In conclusion to the above it has never been a more critical time to involve your retail broker from the very beginning of your development journey. Gaining feedback on where the market is heading over the next 1-2 years and how this could affect your exit strategy can make all the difference to your bottom line. When choosing a broker you need to ensure they understand off-plan sales and have access to a large supply of lenders including private lenders who lend to an array of different scenarios and clients. Another key aspect is to ensure your broker works with the sales agents and the leads generated so they can provide some consistency and ensure all clients have a solution to finance allowing them to purchase your development.
DISCLAIMER: The factual information contained within this article is general in nature not designed to replace professional advice. Before applying for a credit product you should consider the appropriateness of the product taking into account your needs, goals, objectives & financial situation. Australian Credit Licensee Home Loan Connexion - Australian Credit Licensee Number: 387 419 ABN:87 844 985 374
About Author: Mark's background is in Engineering, Finance & Real Estate enabling a unique view of the Real Estate Industry & how it works from three different perspectives. Allowing me to take opportunities, pull together technical aspects, develop new concepts & organise finances to orchestrate residential developments. These 3 qualifications allow Mark to confidently & legally have discussions in the 3 main aspects of property - 'Sites / Construction - Funds - Sales'. By controlling all 3 he can offer greater VALUE to your unique situation. This enables Mark to provide greater immediate value in a client's business to help them reach their long term goals through the right opportunities.