There was a time when buying off the plan was a gamble well worth taking. Investors and ordinary home buyers with a good sense of where the property market was heading could make plenty by speculating in the right buildings in the right area.
Those days are gone, according to a story this week which revealed that off-the-plan buyers in Melbourne are losing money, while in Sydney and Brisbane they aren’t making as much as if they’d bought established units.
So what has changed? When it comes to the fundamentals, the answer is nothing.
Developers are in the business of making money. End of story. They sell properties off-the-plan so that they can borrow the money they need to build.
It’s not just the deposits that persuade the banks to hand over the hard cash, it’s the legally enforceable commitment to buy the units when they are finished.
And unless they are very stupid, the developers can’t lose.
For instance, just over 10 years ago, apartments in the Hyde building at Hyde Park went on sale. There was a rush on the first morning and the marketers quickly realised they had seriously under-priced the apartments.
So they closed the doors, spent a frantic two hours re-pricing all the units, and then opened up again selling the remaining stock – exactly the same units – at significantly higher prices. They still sold out.
Elsewhere, investors were “flipping” units – selling them for a profit before they had even been completed – because the market was rising so quickly in the time between the contracts being signed and the buildings nearing completion.
With a property boom in full flow, some developers decided that if anyone should be making money, it should be them.
So the cost of off-the plan apartments went up because people desperate to get into the property market were prepared to pay top dollar.
Meanwhile we had “sunset clawbacks” where building completions were delayed so investors could be given their deposits back and the units put on the market at higher prices.
And there is shape-shifting, where the unit you paid for might be smaller than you were promised or have even lost a room.
You do get the option to pull out if the change is greater than permitted in your contract, but good luck finding an equivalent unit when you take your 2014 deposit into the 2017 market.
With off-the-plan sales, you are taking a huge punt that the future purchase will retain its value, despite thousands of other apartments being constructed at the same time.
The developer doesn’t have that problem. You are locked into the agreed purchase price, regardless of the eventual value of the unit.
To be fair, the best developers will deliver pretty much what they promised and their apartments’ values will rise.
But there was a time when the biggest financial gamble of your entire life was worth rolling the dice. Nowadays, it seems, the dice are loaded so that “the house” always wins.