New-build buyer risks grow

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Developers are extending timelines for new-build homes due to construction delays, leading to increased risks for borrowers.

Friday, September 10th 2021, 7:36AM 1 Comment

High demand, a lack of building materials, rising costs, and a Covid-19 related labour shortage have led to severe delays in completing new build construction across the country, and developers have begun to push back timelines for completion on new homes.

According to advisers, many developers are offering new homes on two year timelines, with sunset clauses of between 18-24 months commonplace across New Zealand.

With build completions pushed further out, advisers have warned that borrowers are taking on greater risks by signing up for a new home.

Hamish Patel of Mortgages Online said clients had begun to buy homes off-plan on two year timelines, with developers only willing to agree 18 month to two year sunset clauses in many cases.

He warned that the longer timelines would "start to become a riskier proposition for the market".

"It seems the longer timelines indicate developers are selling more of the pipeline. If costs are to increase, how will those fixed prices fare? I wonder if we will see more developers starting to renege on the prices, and wanting to renegotiate fixed prices 12 months from now."

The warning comes amid reports of escalation clauses appearing on new build contracts, allowing developers to heap extra costs on top of original contracts. 

Escalation clauses are not viewed favourably by the banks, which prefer to lend against fixed price builds. They typically demand higher deposits from buyers on non-fixed price deals.

Reports this week suggest new build buyers have been hit with additional costs of up to $65,000 on "fixed price" deals, leading to a greater number of disputes.

Tags: construction developers new build lending

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