“What’s happened to buyers now as they come to settlement, is bank valuations might come in 10 per cent or even 20 per cent below the contract price and the bank is also probably assessing you with more stringent expenses potentially hair-cutting any bonus or commission or other income a bit more,” UBS economist Carlos Cacho said at an update on Tuesday.
“As they reassess you on tighter lending standards you might find that your borrowing capacity is significantly reduced particularly if you are a repeat buyer who already has other debts and they are realising that you are already on six or seven times debt to income.
“There will be cases where there are buyers who will struggle to get financing approved. In those cases they may default or might have to find finance from other means.”
Those “other means” refers to private lenders or non-deposit taking institutions, which fall outside APRA regulations, but even those lenders could be reined in to comply with responsible lending rules by regulators at some stage, Mr Cacho said.
Typically, buyers can expect a 10 per cent reduction in the valuation of their off-the-plan purchase when they come to settle but with current conditions that may be slashed to 20 per cent, according to the analysts.
Mirvac is more vulnerable than other ASX-listed groups such as Lendlease because of their late-cycle projects.
Settlement defaults for Mirvac might be low now – Mirvac maintained a historical 2 per cent rate at its recent half-year results – but that could be camouflaged by generous settlement arrangements. Any hit to earnings would also not flow through for another two years.
“If you speak to private developers they will tell you they are having issues with settlements at the moment,” Mr Druce said.
“The REITs, Mirvac and Stockland, have been very good at giving the buyer more time to settle and so you don’t see the same sort of default rates that you see in the unlisted environment. But we expect that to pick up.”
With completions of new apartments just peaking – there are 100,000 units under construction in Sydney and Melbourne – the worst is yet to come, UBS says.
“We’ve still got a massive pipeline of work under construction despite the slowing in approvals at the moment,” Mr Cacho said.
“We don’t think there is going to be a fundamental oversupply … the risk is more, in the near term, for settlements.”