The risk that off-the-plan apartment buyers will pay more than the property is worth at settlement has increased as prices continue to slide.
Lenders value a property at completion and, if the valuation is lower than the contract price, the loan may be refused or the buyer asked to provide a larger deposit.
Adding to the settlement risk is mounting job losses, which may leave some buyers contracted to buy apartments for which they are unable secure finance once their unit is completed.
Off-the-plan apartment buyers who are unable to settle contracts could lose their deposit of tens of thousands of dollars – typically 10 per cent of the purchase price. They could also be sued by the developer to recover any difference between the original contract price and what the developer eventually receives from another buyer.
The time between signing a contract and construction completion is usually at least 12 months, but can be up to five years.
Property researcher CoreLogic says for the three months to the end of May that of the 3389 off-the-plan unit valuations across Sydney, 52 per cent were lower than the contract price.
During the same period in Melbourne, there were 4173 valuations for off-the-plan unit settlements, with 51 per cent lower than the contract price.
Two years ago, Sydney's incidence of undervaluation was a little above 20 per cent and about 30 per cent in Melbourne.
Otto Dargan, managing director of mortgage broker Home Loan Experts, says he is seeing clients who are not only facing lower valuations for their off-the-plan units but are also struggling financially because their income has fallen dramatically.
Justin Williams, a conveyancer at Boyd Conveyancing, says he has off-the plan clients who have lost their jobs in hard-hit sectors such as hospitality. They are negotiating with developers to extend the settlement dates on their properties, by which time they hope to have returned to full-time work.
Williams says some developers are open to delay settlements because they may not be able to sell the property to another buyer at a higher contract price.
He says those thinking of buying off the plan should seek independent legal advice, as the contracts usually have "numerous special conditions favourable to the developer".
CoreLogic figures show that as property prices recovered during the second half of last year, the incidence of undervaluation eased. But that trend is reversing.
Melbourne's rate of off-the-plan undervaluations has been much greater and longer than for Sydney, particularly among apartments in Melbourne's Southbank and Docklands.
CoreLogic figures show that during May, 2020, dwelling values posted their first month-on-month decline since June last year. The national index was down 0.4 per cent over the month, with five of the eight capital city regions recording falls.
Melbourne property prices were down 0.9 per cent during May and Sydney prices eased 0.4 per cent – though Sydney prices were still 14.3 per cent higher for the year to May 31 while Melbourne prices were up 11.6 per cent.
Tim Lawless, CoreLogic's head of research Asia Pacific, says because of a fall in sales owing to the economic effects of COVID-19, the monthly results should be interpreted with caution. The market has remained resilient to a "material" correction, he says.
"With restrictive policies being progressively lifted or relaxed, the downwards trajectory of housing values could be milder than first expected,” he says.
Property prices have been forecast to fall by up to 30 per cent by the end of 2022, though the big banks and others say the most likely scenario is for price declines of about 10 per cent.