These are the Top 10 'Danger Zones' areas in Australia that carry high settlement and cash flow risk, according to RiskWise Property Research.

RiskWise CEO Doron Peleg said property investors need to be aware of the high degree of risk associated with off-the-plan units, that has recently further increased due to the COVID-19.

 The equity risk, being the risk for price reduction that already had been high prior to the COVID-19, has further increased as investor activity is lower, and their awareness of the risks associated with rental apartments has increased.  

COVID-19 has also increased materially the cash flow risk, as vacancy rates, as per SQM, are at an all-time high peaking in May at 16.2 per cent. In June they dropped slightly to 13.8 per cent.

The table below lists the riskiest areas in the country in terms of oversupply, based not only on the supply itself but also on low demand for rental apartments, in relation to that supply. 

In Melbourne – Melbourne 3000 and Docklands, continued oversupply, especially now with the second wave of COVID-19, and an increased number of unemployed young renters, has seen the vacancy rate rise. According to CoreLogic, the portion of stock advertised across Melbourne saw a large jump from 3.2 per cent of listings advertised in April, to 3.6 per cent over May, representing a total rent listing uplift of more than 3,000 across Melbourne, up to about 27,000 properties for rent over the month, corresponding to a rise in vacancies and falling rental prices.

In Sydney, Mascot is still reeling from the effects of oversupply alongside construction defects where during the December 2019 quarter prices fell 4.6 per cent to $880,000.

Gosford took out the No.1 spot in RiskWise’s 2020 list of Top 10 Danger Zones largely due to oversupply of units (at more than 72 per cent of existing stock) and that units unsuitable for families were not in high demand.

In Queensland’s Surfers Paradise, where houses with pools are the preferred option for residents, the unit market has taken a hit as COVID-19 materially impacts the tourism industry.

Darwin has appeared on the Top 10 list for a number of years where continued economic weakness and poor population growth have had a sustained impact on dwelling prices.  

A soft labour market with a reduction in actual employment has also meant slow growth for dwelling prices in Adelaide which has also made numerous appearances on the list.

Units, particularly off-the-plan, still carry a high level of risk of significant price reductions. Areas with high unit oversupply carry a very high risk and this is still a major issue in some property markets, for example

Melbourne where there is also an undersupply of family-suitable properties.

In addition, the high-profile issues around cladding and defects has created enormous ‘reputational damage’ across the entire industry and because of this, investors have lost interest in high-rise unit developments and were turning to “safer” house-and-land packages suitable for families.

Rental values have also slumped across the country, according to CoreLogic falling 0.5 per cent in the June quarter - the sharpest decline in two years. In addition, unit rents have been hit the hardest with falls in both Sydney and Melbourne of 2 per cent over the past three months.

In conclusion, Mr Peleg said investors buying rental apartments unsuitable for families were taking an enormous gamble, with both equity and cash flow risk expected to materially increase.

Serviceability is also a major factor for investors who rely on a stable rental income to cover the costs associated with property and particularly the mortgage.

He said the risk was particularly high is areas experiencing oversupply.