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Micro sized apartments equal major risk

Micro seems to be the latest buzzword when it comes to property, but do big things really come in small packages?

While micro-apartments aren’t a new concept, as housing in major city hubs becomes out of reach for many first home buyers, they are an alternative to getting a foot on the first rung of the property ladder.

However, the latest analysis by riskwiseproperty.com.au shows there are dangers associated with purchasing these tiny dwellings for a number of reasons.

RiskWise CEO Doron Peleg said many banks had policies in place restricting lending to dwellings under 50sqm. For micro apartments, he said it was unlikely borrowing capacity would be more than 80 per cent, based on the loan-to-value ratio (LVR) with some lenders requiring a much higher deposit than the standard 20 per cent.

“It comes down to resale and if there is an issue of oversupply as well, which is often the case in these areas, then the lenders are very reluctant to proceed,” Mr Peleg said.

“These properties experience very little demand from owner-occupiers, especially as there is a strong preference toward larger units. In addition, many of these properties are bought off-theplan and when investors try to resell they can be in for a nasty shock when they realise there is very little demand.”

He said some lenders were already toughening borrowing terms for higher-density developments, while the Banking Royal Commission is also expected to lead to further lending restrictions being put in place.

This means those who can barely afford micro-apartments would be unlikely to be granted a mortgage if their application was scrutinised, he said, and therefore the overall demand for this type of dwelling could be even lower.

“In addition, there are significant and tangible risks associated with buying off-the-plan units,” he said.

“These dangers include equity risk, cashflow risk and settlement risk. There is a widespread oversupply issue which is universally acknowledged by banks which have blacklists for postcodes suffering potential unit saturation.

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