Should I buy off the plan or established?

By Grant Muller

Melbourne’s booming house prices are making the CBD apartment market (and lifestyle) look more attractive every day - but are the looks deceiving?

For about $500,000 you can secure a fine two-bedroom apartment in the city – and all the benefits that go with it.

However, increasingly dire calls on the state of the CBD apartment market have had many potential buyers wondering if a house in the ‘burbs isn’t a more secure investment for the long-term.

The alternative is to consider whether it is safer to buy an established apartment rather than off-the-plan where all the grief is being experienced.

Figures released recently from a number of sources suggest values in the CBD are falling gently and are unlikely to rise for some time as new apartments keep pouring into the market.

A recent story in the Financial Review (AFR) suggested apartment values in Melbourne have fallen by up to 20 per cent between purchasing off-the-plan and buyers receiving the keys, despite housing shortages and booming residential prices.

WBP Property Group research has found nearly 44 per cent of apartment purchases in Melbourne are below the sale price at the time of completion.

“It’s a tragedy,” said WBP chief executive Greville Pabst in the AFR this month.

“Some investors are losing their deposit because they can’t settle, or they have to make up the funding shortfall.”

But every cloud has a silver lining. 

This opens up a great opportunity for sharp-eyed buyers who have been tracking the market in recent times to grab a bargain – or at least a reasonably-priced apartment.

Buildings now being completed were started around three years ago and there is plenty of data available on off-the-plan prices to work out if you are getting value.

The opportunity stems from the “buy now pay later” approach that can secure an apartment for 10 per cent of the property price and the rest on completion. 

That’s $50,000 to buy a $500,000 apartment – no stamp duty.

However banks are getting worried about the oversupply and are reducing the amount they will lend on apartments.

This means you will require a deposit of 20 to 30 per cent from some banks to buy in the  CBD.

For off-the-plan buyers, this means they can be $100,000 short at settlement on their $500,000 apartment, which means some will have to sell at a loss.

At the same time, apartments are proliferating in Docklands and the inner city markets providing even more competition for the CBD and putting further pressure on prices.

And while it is important not to confuse approvals with construction – many approved buildings are never built – a further 41,400 high-rise apartments were approved in 2013 and 16,000 are under construction.

Therefore before you buy in the CBD make sure you have done your research and understand the underlying value of the apartment and get finance approval first.

Agents Melcorp say it is a simple exercise to determine the market price for an apartment in an inner city residential tower due to many comparative sales of similar apartments within a building.

In the last three months, Melcorp said there have been 621 properties sold in Melbourne CBD by private sale compared to 576 this time last year- up 8 per cent.

To find out what apartments are selling at per sqm – divide the floor space by the price – to determine value.

A 65sqm apartment that sells for $450,000 is valued at $6923 per sqm ($450,000/63) allowing you to compare its price with other apartments in the complex and surrounding buildings.

When you compare new apartment prices with established market prices you will see where the problem is coming from. 

New apartments are more expensive to build today than a few years ago and that saving is reflected in established apartment prices.

Be aware that the boom in apartment numbers in the CBD has led to precincts where prices can vary greatly so ensure you are comparing apples with apples.

And on a positive note Melcorp says in a recent report: “Whilst there are comments in the general media about the over-supply of city apartments, what is often overlooked is the future demand estimates for additional residences in Melbourne CBD due to population growth models.”

“According to the MCC the number of dwellings in the City of Melbourne is forecast to grow from 56,863 to 70,894 in 2020 with a population increase from 121,058 to 148,323.”

“With an average of 1.98 people per household, by 2020, Melbourne CBD will require an additional 13,770 properties to 2020 through to 2036 where it is projected that there will be 103,634 households, a further 32,740 properties will be required.”

At current construction rates we are halfway there in 2104.  

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