33% of of new Starts in Melbourne being Abandoned

[Peter 14.7]

http://theage.domain.com.au/real-es...-new-home-sales-abandoned-20121128-2adpm.html

The above article details how much Melbourne Project Homes sales has slowed from the heady days of 09/10 when abandonments (deposits taken and then left) were at only 5%. They have been 23% for most of the year and just tipped 30%. That is 3 in 10 home deposits are not going ahead.

Now in most cases they are only $500 to $1000 lost but some are a lot more like:

Others buyers have had to walk away from settlements – and much larger deposits worth up to 5 per cent of the purchase price – after failing to get financing on blocks of land that have lost 10 to 20 per cent of their value since they signed the contract.

As an investor this is good news but i don't like to see FHO losing cash but blame the Fed Gov for being too generous. Melbourne now has TOO much supply and a lot of demand was brought forward in 09 with overly generous FHOG.

The old rule: supply versus demand.

Don't expect to see housing in VIC add to any recession busting activity.

FYI Peter 14.7

 

[Melbournian]

there are also delays as well for the OTP - who knows the reasons ... finance or lack of sales

http://www.theage.com.au/business/soaring-delays-hit-offtheplan-buyers-20121130-2alhm.html

 

[Jake Milne]

This has often been the case, it's nothing new. In 2005-2007 my friends working in house and land areas told me that around 35% of packages have to be sold and then sold again because of financial or valuation problems

 

[jim1964]

This has often been the case, it's nothing new.

I live in a new estate in the Adelaide Hills,SA.I was a bit surprised this was a big problem here as well.Both the blocks either side of me actually were contracted twice,before someone actually bought them.

 

[tvadera]

Agree, there seems to be too much of stock in the market.

Have a colleague at workplace who is looking for a place for 1.5 years, goes to inspections every Sat and attends auctions.

His take is: well located and well maintained properties are still commanding a premium in blue chip areas, whereas dime a dozen sort of properties are struggling to sell and adding to sellers woes.

Genuine oversupply or not but media hype definitely creates negative environment (ppl everyday are faced with news like: recession, unemployment, crime, housing slump, etc)

However my take is lot of experience members on this forum have gone past this stage and have been through 2-3 cycles.

Newbies like me who havent even see the upturn of first cycle are more affected by such news but I have learned that you should be in it for the long haul. However there was a nice thread from some other forum member regarding myths about property investment (thats debate for some other time)

 

[truong]

This isn’t a surprise. Super-low bank valuations are the culprit. People get out of contracts when they can’t get the finance they want. As I’ve said in another post banks are shooting themselves in the foot.

 

[wategos]

This isn’t a surprise. Super-low bank valuations are the culprit. People get out of contracts when they can’t get the finance they want. As I’ve said in another post banks are shooting themselves in the foot.

Perhaps they're just aware of what happened to overseas banks who went overboard lending on new developments, so are protecting themselves accordingly.

 

[RightValue]

Maybe 2% of the house and land package valuations I have done in Melbournes West have actually stacked up in the last 4 years.

Hell the land contracts don't even stack up to the $240k sale price, from which we deduct the $10-$15k rebate at settlement plus the builders deposit of $8-15K ... and the borrowers want the bank to finance 90% of $240k ($216k) when they don't even pay $210 for the land and there are hundreds if not thousands of blocks for sale..

Basically you want a house and land package in Melbourne's west you are paying $50k more than if you bought a 5 year old similar house around the corner.

Like I say, it has been that way for years.

 

[RightValue]

This isn’t a surprise. Super-low bank valuations are the culprit. People get out of contracts when they can’t get the finance they want. As I’ve said in another post banks are shooting themselves in the foot.

No. The house and land package is valued compared to resales of completed existing dwellings, which sell way cheaper than the sum of the cost of the land and the construction.

It is just a fact, especially in the West and North of Melbourne.


Here is a little accepted fact. Banks do not do valuations (except for a few of the NAB valuations), independent valuers do the valuations.

 

[truong]

What happened to my daughter:

She bought a home & land package for 350K. Bank valuation came out at 300K.

With my help she objected to the valuation by submitting 4 recent comparable sales, all established homes, ranging from around 320K to 355K. The valuer agreed to raise the valuation by 20K. In passing he said that he was under pressure from the bank who wanted him to value at fire sale value.

I had to give her a bit of money to cover for the shortfall, otherwise she would have to pull out.

 

[Peter_Tersteeg]

This isn’t a surprise. Super-low bank valuations are the culprit. People get out of contracts when they can’t get the finance they want. As I’ve said in another post banks are shooting themselves in the foot.

It's the developers who are shooting themselves in the foot. Consider some of the incentives coming from developers:
* New car with every house.
* "We'll double your first home owners grant".
* $14,000 of extras included.

The list is endless...

All of these incentives are designed to get people to buy now, or to give first home buyers sufficient deposit to buy now. The biggest barrier to entry for FHBs is the deposit, not affordability.

These incentives don't come for free, the price of the property is inflated to compensate. The valuers are aware of this and don't want to be sued by the banks, so they actually do their job properly and put a real figure on the valuation, not just the contract price.

The bank takes the valuation, and funds against that. There's a shortfall and finance falls through; the buyer walks.

The bottom line is many of these properties are over-priced, and it's the developers that are the cause.

Interesting to note that most vendors don't have a real problem with finance clauses, but the builders often won't have a bar of it!

 

[sash]

This is great from a buying perspective....already developers in Melbourne are pulling back in building. Someone with foresight would be negotiating great deals till the surplus is worked through in the next 3-4 years....

 

[Deltaberry]

There's a significant oversupply of poor quality housing in undesirable locations and some of these places even look like swamp land such as PC.

Same thing happened in America. Manhattan has held its value to some extent (been looking at East Village, Lower East Side etc lately) while fringe areas like Buffalo have crashed because of poor quality and oversupply of McMansions. If one think it's a good buying opportunity because developers are falling over, you might as well go to Buffalo and buy some McMansions.

 

[Peter 14.7]

Maybe 2% of the house and land package valuations I have done in Melbournes West have actually stacked up in the last 4 years.

Hell the land contracts don't even stack up to the $240k sale price, from which we deduct the $10-$15k rebate at settlement plus the builders deposit of $8-15K ... and the borrowers want the bank to finance 90% of $240k ($216k) when they don't even pay $210 for the land and there are hundreds if not thousands of blocks for sale..

Basically you want a house and land package in Melbourne's west you are paying $50k more than if you bought a 5 year old similar house around the corner.

Like I say, it has been that way for years.

Great Feedback! Peter

 

[Zerosignal]

Maybe 2% of the house and land package valuations I have done in Melbournes West have actually stacked up in the last 4 years.

Hell the land contracts don't even stack up to the $240k sale price, from which we deduct the $10-$15k rebate at settlement plus the builders deposit of $8-15K ... and the borrowers want the bank to finance 90% of $240k ($216k) when they don't even pay $210 for the land and there are hundreds if not thousands of blocks for sale..

Basically you want a house and land package in Melbourne's west you are paying $50k more than if you bought a 5 year old similar house around the corner.

Like I say, it has been that way for years.

Interesting you say that RV.

We just got our valuation back and as we brought our land at a bargain price they couldn't knock us back on the land price.

Our valuation has the land at purchase price but the build at $100k under with the comments that $300k is too high for a 36sq home build, I'd like to take that valuer around and show me where can you build a 36sq home for $200k...

Either way not going to stop us as we have a massive deposit approx 30% of the purchase price all up, but I am dead set against paying LMI at the moment.

 

[RightValue]

Interesting you say that RV.

We just got our valuation back and as we brought our land at a bargain price they couldn't knock us back on the land price.

Our valuation has the land at purchase price but the build at $100k under with the comments that $300k is too high for a 36sq home build, I'd like to take that valuer around and show me where can you build a 36sq home for $200k...

Either way not going to stop us as we have a massive deposit approx 30% of the purchase price all up, but I am dead set against paying LMI at the moment.

What street in that suburb, or what suburb are we talking about out of curosity?

 

[natedog]

Hey All,

having worked on the frontline of the volume building scene in melbourne for the last 8 years, i can say that a cancellation rate of between 25-30% is what ALL big builders factor in.

its always been that high...even in the boomy first home owners grant crazy times!

vals, finance issues, break ups, moving interstate, cracking it with the builder due to poor service...too high site costs, needing to save more money...etc etc are the reasons we see all the time.

what the worryingly obvious trend (for the industry) is that new sales volumes are way down and the vals are currently not stacking up others have mentioned above.

i know of quite a few clients where the land val stacked up when they bought the land but when they go to add the construction price on top...it falls a fair way short of what they need.

lower new sales, coupled with clients inabaility to fund the construction due to vals (if they have a high LVR).....its not looking real flash for new build volumes.

i also have clients who have decided that an established property offers them better value than a new build also, in specific cases i agree.

i reckon that if this trend coninues its just going to add pressure to the rental pool....if someone cant build, they still need a roof over their heads.

or it will add pressure to the established market...

or it will have no effect on established in the short term...as people will just sit on their hands and delay doing anything.....

but if population continues to grow and new build numbers dont increase, it just points to increasing underlying demand down the track for both rentals and established homes.

lower interest rates....WITHOUT massive job losses...could see some pressure on prices in the upward direction into the new year....or not.....who knows.....

i dont

 

[buzzlightyear]

Hey All,

having worked on the frontline of the volume building scene in melbourne for the last 8 years, i can say that a cancellation rate of between 25-30% is what ALL big builders factor in.

its always been that high...even in the boomy first home owners grant crazy times!

vals, finance issues, break ups, moving interstate, cracking it with the builder due to poor service...too high site costs, needing to save more money...etc etc are the reasons we see all the time.

what the worryingly obvious trend (for the industry) is that new sales volumes are way down and the vals are currently not stacking up others have mentioned above.

i know of quite a few clients where the land val stacked up when they bought the land but when they go to add the construction price on top...it falls a fair way short of what they need.

lower new sales, coupled with clients inabaility to fund the construction due to vals (if they have a high LVR).....its not looking real flash for new build volumes.

i also have clients who have decided that an established property offers them better value than a new build also, in specific cases i agree.

i reckon that if this trend coninues its just going to add pressure to the rental pool....if someone cant build, they still need a roof over their heads.

or it will add pressure to the established market...

or it will have no effect on established in the short term...as people will just sit on their hands and delay doing anything.....

but if population continues to grow and new build numbers dont increase, it just points to increasing underlying demand down the track for both rentals and established homes.

lower interest rates....WITHOUT massive job losses...could see some pressure on prices in the upward direction into the new year....or not.....who knows.....

i dont

Intuitively, wouldn't land values come down in a downturn more-so than build costs?

Given cost of raw materials hasn't reduced and in many cases increased, the stickiness of labour costs, which means they don't necessarily come down, I can't see where build costs can come down by more than land value. Unless builders were making a huge profit margin, that valuers realise and are now paring that back through their lower vals?

 

[Aaron_C]

Intuitively, wouldn't land values come down in a downturn more-so than build costs?

Given cost of raw materials hasn't reduced and in many cases increased, the stickiness of labour costs, which means they don't necessarily come down, I can't see where build costs can come down by more than land value. Unless builders were making a huge profit margin, that valuers realise and are now paring that back through their lower vals?

It's not the 'land value' that is dropping. The Land/Building value that the valuer puts on his report doesn't actually mean anything in and of itself. It is just an allocated split of the final valuation, which is derived from sales evidence.

On a new volume build in a new estate, your typical land cost is about $270,000. Your new house from a Carlisle Homes etc would be about $250,000 for a 30 sq house. That brings total hard costs to $520,000.

Now, the valuer has to value the entire completed house based on sales in the surrounding area. If the purchaser has overcapitalised, such that the hard costs is well in excess of surrounding properties being sold, then of course the valuer can only value the property at a much lesser price, say $480,000 for example.

If this happens, the valuer has to now say that the actual 'value' of the land is now $230,000 since the construction costs are 100% known to be $250,000. However, this doesn't mean that the land has 'lost value' of $40,000. It just means that the purchaser has spent too much on the house compared to what would sell around the area. I hope that makes sense but it is far from scientific.

 

[bits1010]

the problem is there are lots of big existing houses in good, near cbd areas of melbourne, currently with 1 widow in it,

one example is my parents' place, their big house currently has 2 residents in it, and their neighbours are all widows living in a big house.

the market just need time to put few more people in these houses, one way or the other.

with the age distribution of aust. population I will expect more existing houses will come to the market in the coming decades....

but if population continues to grow and new build numbers dont increase, it just points to increasing underlying demand down the track for both rentals and established homes.