Buyer beware: the red flags for high-risk properties in the Australian housing downturn

The second half of 2018 saw the major risks associated with the residential property market increase significantly and this will continue well into 2019 and beyond, according to RiskWise Property Research CEO Doron Peleg.

He also stated, tighter lending standards, the results of the Royal Commission, the fear of the potential changes to negative gearing and capital gains tax, political uncertainty and unit oversupply, in conjunction with a sharp drop in dwelling commencements, will shape the entire landscape of residential property into 2020.

“And this means it is more important than ever to identify the red flags when it comes to buying property,” Mr Peleg said.

“There’s every chance the ALP will win this year’s Federal election and implement changes to negative gearing and capital gains tax. In fact, we have already seen an impact on the market due to uncertainty and fear about these changes, with price reductions accelerating following the Liberal leadership spill of Malcom Turnbull by Scott Morrison. In addition, auction clearance rates have dropped below 50 per cent in both Sydney and Melbourne.

“The risk of price reductions are likely to remain very high at least until the second half of 2020. This adds uncertainty and impacts buyer sentiment,” Mr Peleg stated.

Riskwise state that they have identified the red flags for high-risk dwellings that property investors should avoid,

These include oversupply, poor economic growth, as seen in Perth and South Australia, high unit-to-house ratios, high vacancy rates and units unsuitable for families.

Mr Peleg said there was a "high possibility" the value of an off-the-plan property may decrease between the original contract date and settlement.

Regions most as risk of this are Brisbane City, Fortitude Valley and South Brisbane which have all been named in the Top 10 of the RiskWise 2018 list of the 100 Worst Off-The-Plan Suburbs in Australia.

So have Zetland and Epping in Sydney and Southbank in Melbourne, where oversupply of units is a huge issue.

RiskWise research shows high-rise buildings generally carry higher risk than small unit blocks from both a capital growth and cashflow perspective, although Mr Peleg said this risk depended on the specific suburb and other factors such as strata payment and specific property features, all of which should be assessed on a case-by-case basis.

When it comes to purchasing property and avoiding the potential risks it's critical to perform independent research and avoid taking advice from so-called “property professionals or wealth creators” who were not paid for their services.

“No one works for free in the housing industry. If you are not paying, you are not the client, and someone else is, for example a property developer, and that means there is an agenda to get you to buy whether it is for your benefit or not. In other words, you will pay in the long run,” he concluded.