Buying off-the-plan in New South Wales (NSW) is often seen as a smart investment strategy, offering the opportunity to secure a property at today’s prices with the potential for capital growth by the time the development is completed. However, one of the most significant risks buyers face is market value drops. This occurs when the property’s value decreases between the time of purchase and the settlement date. For off-the-plan buyers, this can lead to financial stress, difficulties securing financing, and even the collapse of the purchase altogether. In this article, we will explore the causes and consequences of market value drops, using real examples from NSW, and offer guidance on how to protect yourself from this potentially devastating outcome.
Market value drops occur when the market conditions change unfavorably between the time a buyer signs the contract for an off-the-plan property and when the property is completed and ready for settlement. Several factors can contribute to these drops, including:
As the market value of their properties began to drop, buyers were left in a state of panic and uncertainty. Many had planned their finances carefully around the expected value of their new homes, only to discover that the property was now worth significantly less than what they had agreed to pay. Some buyers found themselves in negative equity, where the property’s market value was lower than the outstanding mortgage, leaving them trapped in a financial bind.
For one buyer, the drop in market value meant that they could no longer secure the financing they had been pre-approved for. As the settlement date approached, their lender reduced the loan-to-value ratio, forcing the buyer to come up with tens of thousands of dollars to cover the shortfall. Desperate to avoid defaulting on the purchase, the buyer considered liquidating other assets and borrowing from family members, but the stress of the situation took a heavy emotional toll. Meanwhile, developers, eager to avoid legal disputes, faced pressure to renegotiate prices or offer incentives to keep buyers from walking away.
Market value drops in off-the-plan purchases can have severe legal and financial repercussions for buyers. When the property is worth less than the purchase price at the time of settlement, buyers may face challenges in securing the financing they initially arranged. Lenders often reassess the property’s value before settlement, and if the market has dropped, they may reduce the amount they are willing to lend. This leaves buyers needing to come up with additional funds to cover the gap, which can be financially crippling.
Introduction
In the 2018 case of Re Estate of Phillips [2018] NSWSC 431, a group of buyers in NSW found themselves caught in a difficult financial situation due to a sudden drop in property values. The development, located in Parramatta, had initially been marketed as a high-end apartment complex with strong capital growth potential. However, by the time the project was completed, a downturn in the property market had led to a significant reduction in the value of the units, leaving buyers facing negative equity.
Market Value Drops and Financial Strain
The Phillips development attracted a diverse group of investors and owner-occupiers, all of whom expected the property to appreciate in value by the time it was completed. However, within a year of the project’s commencement, Sydney’s property market experienced a sharp decline, driven by rising interest rates and a cooling of foreign investment. By the time the development was ready for settlement, the market value of the units had dropped by an average of 15%, leaving buyers in a precarious financial position.
Behaviour of the Participants
As the market continued to decline, buyers grew increasingly anxious about their ability to settle on the properties. Many had arranged financing based on the original purchase price, but with the reduced market value, their lenders reassessed the loan-to-value ratios, resulting in significant shortfalls. One buyer, who had planned to use the equity in their existing property to fund the purchase, found themselves unable to bridge the gap and faced the prospect of losing their deposit.
The developer, facing pressure from buyers, offered limited incentives, such as minor upgrades to the units, but refused to renegotiate the purchase price. This led to growing frustration and desperation among buyers, many of whom felt they had been misled about the project’s potential for capital growth.
Legal Process and Court Involvement
Several buyers eventually filed a lawsuit against the developer, claiming that they had been misled about the expected market value of the units at the time of settlement. The NSW Supreme Court examined the evidence, including marketing materials and communications between the developer and buyers, to determine whether the developer had misrepresented the property’s potential for capital growth.
While the court found that the market downturn was beyond the developer’s control, it also ruled that the buyers had entered into the contracts with a reasonable expectation of the property’s value. As a result, the court ordered the developer to refund a portion of the deposits to the buyers who were unable to settle, mitigating their financial losses.
Financial Consequences
The financial consequences for the buyers were severe. The 15% drop in market value translated to a loss of between $75,000 and $150,000 per unit, depending on the original purchase price. Many buyers were forced to seek alternative financing or liquidate other assets to meet their settlement obligations. The legal costs associated with the dispute added further strain, with total legal fees exceeding $500,000. For some buyers, the financial impact of the market value drop meant that they were unable to continue with the purchase, resulting in the forfeiture of their deposits.