Speculators or struggling home buyers are trying to offload four in every 10 land lots listed for sale in Melbourne’s fringe housing estates, new analysis shows.
The large spike in speculators attempting to flip land lots purchased at the peak of the residential market in March last year explains a similarly sharp hike in buyer default rates, which land developers fear are yet to fully wash through the market.
Analysis by RPM Real Estate Group’s Q4 Residential Market Review shows 8 per cent of buyers are defaulting on contracts across Melbourne and Geelong’s housing estates, well below the alarming one in four figure reported by the country's largest private land developer, Satterley Property Group.
RPM oversees about a quarter of all sales in Melbourne’s land market.
Other large players, privately operated Villawood Properties and ASX-listed Peet, have put contract defaults between 1 and 4 per cent. Default rates under 10 per cent are considered tolerable within the industry.
RPM’s head of communities, Luke Kelly. said sales on the so-called Gumtree index - mainly speculators or mum-and-dad buyers re-selling their contracts on classified websites - hit a peak of 2415, or 39 per cent of total available lots, in December.
Greenfield property developers like Stockland and Mirvac pre-sell land lots on 10 per cent deposit contracts to young home buyers and families in their estates up to two years before they hand over the title to the purchasers and settle the property.
Melbourne’s rapid rise in city-fringe land prices - they shot up about 65 per cent between early 2016 and mid 2018 - encouraged speculators to pile in and on-sell their contracts for a profit.
A subsequent downturn in the land market has sharpened precipitously.
During the December quarter last year, lot sales slumped 42 per cent from the previous three-month period, RPM reports.
They were down about 58 per cent from the same quarter a year earlier.
The slide has caught out speculators who are now desperate to offload contracts and has sandwiched mum-and-dad buyers who purchased at the peak of the market before the major banks significantly tightened lending standards.
Mr Kelly said struggling mum-and-dad buyers who were now being rejected by the banks made up about half of the re-sales on the market, the rest were likely speculators.
“While they’ve settled on the land component, now they probably can’t afford to build their home and have had to put their block back up for sale,” he said.
Most were likely to make a small profit or break-even because, so far, land prices have held steady, a key criteria in containing defaults.
Nevertheless, developers are braced for a surge in defaults between July and October, when thousands of lots purchased at the market’s peak are expected to settle.
Median lot prices increased a marginal 1.1 per cent to $325,000 over the quarter, RPM said.
Villawood managing director Rory Costelloe said: “Everything stacks up to valuations at the moment.”
If values fall, banks will lend less, and more buyers won’t honour contracts.
“If they have not been able to offload on Gumtree, they will all just default,” he said.
Developers have responded to slowing sales and price pressures by offering buyers smaller blocks or townhouse-style homes, rather than reducing prices.
Surprisingly, the price of developers' lots were still below the asking prices of speculators' re-sales, mainly because of smaller block sizes. Developers were also offering discounts, incentives and rebates.
“All those sorts of things generally work out to a 5 per cent discount,” Mr Kelly said, equating to about $15,000-$20,000 off the median land price.
“While the overall residential market will take time to recover throughout 2019, some sub-markets, such as vacant land, will likely recover more quickly as first-home buyers come back in larger numbers as access to credit improves,” Mr Kelly said.