Two news articles in the past week herald the beginning of the long predicted inner city apartment market crash.
‘Melbourne CBD apartment values fall 30%, settlement fears rise’ wrote Michael Bleby, Australian Financial Review, 29 March 2016. A few hours later his colleague, Larry Schlesinger, reported ‘Melbourne developer turns to self managed super fund investors to fund apartment project’.
These twin themes, bad news on valuations and increasingly innovative yet desperate attempts to find alternative development finance, will repeat in the property press for some months or even a couple of years as this phase of the market plays out. The stories will come first as we have seen in Melbourne, then Brisbane, and then Sydney. It’s entirely predicable. The numbers never lie.
What happens next is also predictable; ‘off the plan’ purchasers will fail to complete their contracts as banks tighten lending criteria, developers will go broke, receivers will be appointed by the developers’ banks, new builders will be contracted to complete partially built buildings to a lesser standard than agreed with the purchasers. And those that settle will have defects to fix and will struggle to collect levies from owners with no equity left in their investment property.
There will be no winners, perhaps with the exception of the receivers and lawyers, but history suggests that the unit owners will be the biggest losers; some will lose deposits, some will be forced to settle and take big hits on value and others will be left to raise special levies to remedy defects in the absence of solvent developers to sue and government-mandated insurance to claim against.
But these are monetary losses. If the apartment investing class of 2016 only lose money, they will be lucky. There is much more at stake. Health, happiness, relationships and sadly even life itself will be at risk as investors ride the roller coaster of grief akin to the model put by the Swiss-American psychiatrist, Elisabeth Kübler-Ross, as the five emotional stages of dealing with the death and dying of a loved one.
First denial, ‘This can’t be happening. We worked so hard for this. We thought we were dealing with people we could trust. Our family home is at risk’.
Next anger. It will be directed to whoever they can find to blame, whoever they think made them make this investment; the agents that oversold, the bank that lent too much, the conveyancer that didn’t explain enough, the wife that insisted or the husband that was cavalier.
Bargaining follows. Little deals are done with one’s self, ‘It will all work out when the dust settles’,’ The government won’t let this happen’, ‘The media will bring us justice’. Bargaining buys time for us to deal with our loss.
Depression descends. Investors will become moribund, stop opening letters and bills from the strata manger, decline invitations to go to meetings with class action lawyers. Money will get too tight to mention.
And mercifully acceptance arrives, ‘This is my problem, no matter who’s to blame it’s up to me to do something. What are my options? They mightn’t be pretty, but there are always options’.
Savvy unit owners will be brave. They will face facts fast rather than wallowing in denial and false hope for too long while developers shift assets, wind up companies and let important time limits for making claims go rushing by. They will make realistic assessments of litigation prospects and strike hard while there might be something to be had, or they will save on legal costs to pay for their repairs. In litigation, there can be no half measures. But most unit owners won’t be savvy.