- Off-the-plan purchases face increasing scrutiny due to widespread negative experiences and industry challenges.
- Equifax's iCIRT system offers a solution, rating builders and developers to enhance consumer confidence.
- Despite potential savings, off-the-plan purchases often lead to financial loss and dissatisfaction for buyers.
Off-the-plan has a bad reputation. Generally, the consensus is the cons heavily outweigh the pros for first home buyers. The news cycle is rife with stories of builders going bust, budget blowouts and developments being stalled.
Everyone knows a story of a friend or a friend of a friend who bought a land and house package, lured by the promises of easy financing, picture-perfect showrooms, and coercive copy telling you about how the location affords direct access to a pristine swimming beach, or how it is perched atop plush rolling hills.
Next thing you know, you get the keys, the roof is falling off, the toilet is flooding, your partner is screaming at you, and the line to your builder has disconnected.
How did we get here? People tell us never to buy off-the-plan; buy established. Where did things go wrong in the industry?
We spoke to Equifax‘s head of product and rating services, Brad Walters, who told us that the past couple of years have been nothing short of chaos for construction.
“The sector experienced a 42% increase in insolvencies over 2023, and incidents of building defects and big-name collapses have consistently made headlines, keeping these issues front of mind for industry players and consumers alike,” he said.
“In this environment, some will seek to catastrophise the entire construction industry as being unreliable.
“But while there have been instances of untrustworthy builders leaving off-the-plan purchasers in a bad situation, there are many capable, reliable and resilient industry players who are dedicated to doing the right thing. The opportunity is there to rebuild consumer trust and for trustworthy building professionals to benefit in the flight to quality and reliability.”
NSW’s iCIRT system
Equifax developed the Independent Construction Industry Rating Tool (iCIRT) in collaboration with the New South Wales (NSW) government.
iCIRT rates developers, builders, building and design practitioners, certifiers, trade contractors and consultants between one and five stars.
Businesses that obtain three gold stars or higher are deemed trustworthy.
Consumers can search the iCIRT registry to find trustworthy builders, which gives them more confidence in choosing their building professional.
How do we get out of the housing crisis without building new?
According to Equifax’s consumer research, nearly half of the surveyed Australians lacked trust in the building industry.
Furthermore, with construction costs remaining at elevated levels, demand has been concentrated in the established sector.
This brings the question, how can we escape the housing crisis without building more supply?
“There’s no doubt that we need high-quality housing that is accessible and affordable to all Australians. For many consumers, off-the-plan developments meet this need,” Walters responded.
“In light of the ongoing challenges facing the construction industry, however, even organisations with strong track records have become more vulnerable to the impacts of external stressors and adverse events. Given these circumstances, it’s encouraging to see a number of initiatives that are being put in place to help consumers buy with greater confidence.
“For example, Regulators have increased their inspections and surveillance programs, and the early results in NSW are positive.
“Some insurers are now offering first-resort latent defects insurance on apartment buildings.”
“Prospective buyers are performing more due diligence than in the past, seeking independent ratings on the reliability, resilience and trustworthiness of their builders.”
“By providing an independent and rigorous review of building professionals’ businesses, iCIRT is playing a pivotal role in building greater resilience, more confident buyers and investors, and more reliable, trustworthy buildings that will stand the test of time.”
Brad Walters, Equifax
Why are off-the-plan purchases falling through?
Walters noted that the issues plaguing off-the-plan purchases were symptomatic of a systemic issue within the industry.
“The issues facing off-the-plan developments are similar to those facing the industry more broadly. These include the higher cost of materials, a shortage of skilled labour to complete projects, and payment delays, resulting in contagion risk given the financial distress across some trading partners.”
For consumers insistent on purchasing off-the-plan, Walters reiterated that the best way to protect themselves off-the-plan is through rating systems.
“We encourage all consumers to determine if their builder or developer is iCIRT rated.
“We know that many consumers have construction and property plans – in fact, iCIRT research from late last year showed that 45% of Australians intend to purchase, renovate or build in the next five years. However, only three in ten Australians have a positive perception of the construction industry, so there is a significant gap to bridge.
“The good news is, rating tools like iCIRT help provide consumers peace of mind. Our research shows that 76% of consumers aware of iCIRT reported an improved perception of the construction industry in the past 12 months.
“Equifax understands some customers have requested their purchase contracts include a termination and refund clause if the developer does not obtain and maintain a trustworthy iCIRT rating before practical completion.”
The other side of the coin
While Walters may be more optimistic about the state of off-the-plan purchases, Select Property Advocates director, Carly Susic, offered a dissenting viewpoint.
“We have reached this point because so many purchasers have had a poor experience buying off-the-plan,” she said.
“This can be anything from builders going broke, time delays, delivering the property with different specifications, and losing money due to the lack of growth, leading to negative equity.
“And, overpaying to line the pockets of either the developers or the many property spruikers who push these products onto unassuming buyers who get sold the dream from glossy brochures and renders that never look the same as the finished product.
“The industry standards for these properties have been average for many years. It is not a new problem. However, in the current climate, this may be more prevalent due to so many builders going under and the increased costs of raw materials and supplies.”
With delays and builders going belly up, new builders receiving stalled projects may resort to corner-cutting to meet deadlines or design requirements.
“Buying established properties is better for several reasons. First, you know what you are getting; you can walk through the home and see how the light comes in, the size of the rooms, feel the quality of the build (and have it inspected by a building inspector), see the neighbours, and how the property fits into the streetscape.
“Off-the-plan properties are less likely to have capital growth due to a lack of scarcity and rarity that a quality established property has. In many cases, an off-the-plan purchase will lead to losing money due to the value declining rather than going up. There is often a delay in the property being finished, which can sometimes be years.
“In this time, people’s circumstances can change.”
“A high-grade established property has stood the test of time and, depending upon the style of the property, will often have larger rooms, higher ceilings and more charm and owner-occupier appeal.”
Carly Susic, Select Property Advocates
No upsides to off-the-plan
We asked Susic if there were any pros to buying off-the-plan, and she replied simply.
There are none.
“I would not recommend an off-the-plan purchase to anyone.
“There are many cons. You can’t experience the property in person; some homes have a great feel, others don’t when buying off-the-plan, and you don’t experience the atmosphere, the room dimensions, the view, or the general vibe of the property.
“Often, there are also changes to what you think the property will offer, and it is very difficult to deal with developers to make good on any mistakes they make or, in some cases, changes to room sizes or shapes.
“These properties are frequently poorly constructed with many cut corners; many new developments suffer cracks in the external rendering and do not age well.
“The biggest problem we hear of in these buildings is water ingress. This can be due to several factors: inferior plumbing, poorly waterproofed bathrooms and balconies, cheap windows and doors without adequate flashing, the list goes on. Often, these problems are difficult to fix and ongoing, and getting the builder back to fix even when in warranty is often a problem.
Susic also observed that changes in one’s finances or circumstances can easily cause off-the-plan transactions to sour. Buying an off-the-plan development entails signing a contract and committing to a price for a product that may take years to settle— years that may see your financial circumstances or market conditions radically change.
“Banks may decide your loan is no longer reflective of the property value due to market fluctuations and interest rates. You may lose a job, grow your family or even have a change of heart, leaving you exposed to losing your deposit or stuck with a property you don’t want that is not worth what you paid for it.
“These properties are usually oversupplied and overpriced, leading to a lack of growth. You will be sold the promise of stamp duty savings, but this is a fraction of the cost risk in buying this type of property.
“Generally, in these transactions, the only people that make money are the developers, people paid hefty fees to sell the property to you, often claiming to be a property expert.
“Buyers need to beware of anyone telling them about or offering them a free service to purchase off-the-plan, as they will be paid by the developer without disclosure.
“When you’re buying off-the-plan, you do not have a fixed idea of the body corporate fees and council rates, and they can often be much higher than you estimate.
“The biggest con of all really is that these properties so often lose money due to lack of growth. Yes, we are going through a housing crisis, and we need more homes, but there is an oversupply of these low-grade properties and an undersupply of quality properties.”
Much of what Susic said makes sense. Brushing aside concerns about workmanship, financing, or personal circumstances, purchasing off-the-plan is a poor investment proposition.
The construction industry faces a labour crunch, and materials persist at higher levels, factors that will be priced into your contract. In other words, you will likely be overpaying for an off-the-plan home.
State of play from a buyer’s advocate perspective
Susic explained that the primary reason that off-the-plan transactions flop is market turbulence. Post-contract market shifts may render properties no longer viable for a loan at the purchase price agreed at before the home’s completion.
“An off-the-plan property is a high-risk property in any market, let alone a falling market. This type of property is low-grade and, therefore, at higher risk of being affected by market fluctuations and changes.”
Changes in personal circumstances are another key driver of failed off-the-plan purchases.
“This could be financial, where the purchaser can no longer complete the purchase due to losing a job, etc., and cannot get a loan, or changes to personal situations due to health, needing to move away, or family circumstances that mean the property is no longer suited to the buyer’s needs.
“I do have a few case studies on this—one where they had to sell immediately due to medical reasons but were able to settle and sell (still lost money), and another that had to sell immediately due to the property not meeting expectations and being overlooked due to a property going up next door, but was able to settle and sell (still lost money).
“One had to forfeit the deposit and return the property, hoping the developer did not sue them because they couldn’t get finance.
“I also know many people that have managed to settle and struggle to keep them for a number of years only to sell them at a loss, sometimes even after 10 years.”
Depressingly, Susic opined that it is impossible to fully protect yourself from an unscrupulous developer.
“There is really no way to protect yourself fully.”
“If you insist, research the developer and the builder. Go and see some of their older developments and see how they age and how they have performed regarding growth.”
“Make sure they get advice on the contract from a legal representative who is experienced in off-the-plan and can help negotiate the contract to be as good as it can be in your favour.”
Carly Susic, Select Property Advocates
“Stick to low density with as much land component as possible, not high or medium density. Research the prices in the area and those of others who have sold the plan previously and resold it.”
