Short-term property value movements – one more big risk in ‘rent to own’
The following provides examples of some short-term property price movements, and illustrates how this is one more risk faced by many vendor finance/rent-to-own ‘buyers’.
Many lease options are for terms of 2-3 years. Many vendor finance arrangements are set for a maximum of 3-5 years, or impose additional costs after that time.
In addition to all the other risks associated with these deals, the potential buyer will usually lose all money paid to date if a mortgage application is unsuccessful at the end of the term. One factor that will influence a lender’s decision is the lender’s valuation of the property. If the property was over-priced and/or the value hasn’t increased adequately the mortgage application may be rejected. The “buyer” will lose everything and the seller will make a big ‘wind-fall’.
‘Rent-to-buy’ properties are priced at a premium – often at least 10-15% above the value cited by the seller/intermediary (and the current value cited may be higher than the actual value).
So, regardless of other factors (such as the consumers credit record, employment history, income and accumulated funds), an increase in property value of anything less than 5% per year could kill the deal. In many cases a greater increase would be required.
There can be significant volatility of prices within these short term frames making short-term property value fluctuations yet another risk faced by tenant/buyers.
Examples of property value movements.
The following examples of short-term property value movements in some areas in Victoria, show the risks taken by anyone relying on a short-term increase in property value in order to have adequate equity in order to quality for a mortgage.
These examples are from some areas where houses have been sold on vendor finance/rent-to-buy.
Some recent deals I’m aware of are in Craigieburn, Truganina, Doreen, Wyndham Vale, Tarneit.
The average increase in median prices in Craigieburn from 2004-2014 was 5.1% per annum, but prices fell over 4 years between 2010 and 2014.
The average increase in median prices in Truganina from 2004-2014 was 3.8 %. However prices dropped from 2011-2012 and also between 2005 and 2007.
The average increase in median prices in Doreen from 2004-2014 was 6.2 %. However, prices dropped between 2007-2008 and 2011-2014, and remained constant from 2007-2009.
The Wyndhamvale average increase over the 10 years was 5% per annum, but prices decreased over 2006-07 and 2011-2014
The average increase in Tarneit was 4%, with prices dropping during one year in the period.
(My calculations based on “Houses by suburb 2004-2014”, Dept of Land, Water, Environment and Planning (Vic))
The GFC hit in this period, so what about values before then?
In the early 2000s rent-to-buy industry figures provided some examples of “successful” vendor finance cases. These examples were provided at a time of rapid increases in property prices throughout Victoria. For example, two of the property locations (Ballarat and Wendouree) experienced price growth over a 2 year period of 2000 – 2002 of 48%.
However, median price growth in the five locations cited were much lower over 11 years (92-2003):
Ballarat 7.1%, Mildura 6.2%, Morwell 2%, Traralgon 4% and Wendouree 5.1%.
However, if the 3 years of higher growth are excluded, the average annual increase over the 8 years from 1992 – 2000 were Ballarat 3.6%, Mildura 4.4%, Morwell -1%, Traralgon 1.9% and Wendouree 1.2%. There were of course a number of years of negative growth. Both Morwell and Wendouree median prices were less in 1997 than they were in 1992.
(These calculations are based on property data obtained by Consumer Action Law Centre for its 2007 report “Vendor Terms, Rhetoric & Reality)