If you’ve noticed more advertising from project home builders recently, it’s not just a grab for more market share. Builders are the first to notice a drop off in buyers looking to build their own home, and the latest report from CoreLogic confirms the decline. When business is booming, builders can only cope with so much work, and they steer away from advertising and promotions – so when you start to hear and see radio and TV advertising, you know they’re looking for more work.
The construction cycle has peaked, with dwelling approvals much lower than recent peak levels. And it’s continuing to trend lower.
National dwelling approval data for May 2017 is now at the lowest since October last year. The number of approvals fell by -5.6% and they are -24.8% lower than at the peak. Sydney, Melbourne and Brisbane have all seen a substantial slowing of dwelling approvals over the past year.
Oversupply of units
We’re coming off the highest number of unit dwelling approvals in the last 20 years, so now we are starting to see completed developments hitting the market or are due to complete in the next 6 to 12 months. This is where it gets dangerous for buyers and banks.
CoreLogic is reporting that with inner city unit markets facing a large number of high rise settlements over the coming years, there is likely to be a heightened level of risk in key inner city markets for at least the next 24 months.
Dangers for buyers and banks
With an oversupply of new units, banks get nervous, and they start valuing these properties lower than what the developers are trying to sell them for. We’ve already started to see postcode restrictions placed on certain suburbs of Sydney where banks will only lend up to 70 or 80% of the value, leaving the buyer to chip in more money as a deposit. In addition to that, the demand has decreased with investors finding it more difficult and more expensive to secure finance.
This results in lower demand and an oversupply of units on the market. The only option will be for developers to reduce their pricing, but they won’t do that quickly. Developers with projects in the pipeline will also struggle to secure development funding to complete the project, as valuations will start to decline.
Buyers who have purchased off the plan based on an old pre-approval will need to keep in mind that when the property nears completion and a final bank valuation is required, it may well be lower than the original purchase price. Buyers should not rest on their pre-approval status and continue to squirrel away cash to ensure they can complete the purchase, if the valuation comes in low and low LVR (Loan to Value Ratio) restrictions of 70-80% come in to play when they had originally planned on a 90% LVR.
Tradies should prepare for a downturn in work
It stands to reason that if the number of building approvals decline, the amount of work available to trades declines. The pipeline of work for builders may stagnate resulting in a gap in available work for the associated trades. Tradies should always monitor construction approvals as it is a key indicator of work, particularly those who work on high and medium density projects.
The housing construction market looks to remain relatively stable as housing construction approvals are declining at a slower rate, so those trades working on smaller projects will feel less of an impact over the next 6 to 12 months.
Keep in mind, in the last 2-3 years we’ve experienced the highest unit construction approvals ever, and the work has been flowing for associated trades. As these decline and construction commencements slow, tradies will need to work extra hard to find the same level of work and income that they’ve experienced in the last 2 years.
Finance for new homes
Building your own home is a wonderful (and stressful) experience, and the finance process is a little different to buying an existing home. Construction loans are paid in stages that align with the builder’s schedule, which is helpful as your repayments start low, and increase as the build moves through to completion. Securing a construction loan is best done with the help of Sydney mortgage broker Mint Equity as we’ll help you secure the best interest rate and terms to help reduce your costs during the build.