“The ordinary market price of land depends everywhere upon the ordinary market rate of interest. If the rent of land should fall short of the interest of money by a greater difference, nobody would buy land, which would soon reduce its ordinary price. On the contrary, if the advantages should much more than compensate the difference, everybody would buy land, which again would soon raise its ordinary price. When interest was at ten per cent, land was commonly sold for ten and twelve years’ [rent]. As interest sunk to six, five, and four per cent, the price of land rose to twenty, five-and-twenty, and thirty years’ [rent].”
Adam Smith in 1776
Higher interest rates mechanically reduce the price of land. Lower interest rates mechanically increase the price of land. This has been well documented since the 1600s and probably known since time immemorial. Notwithstanding, there are a lot of people running the country who are somehow unaware of this, the Reserve Bank of Australia being one of them.
Many buyers were lulled into the recent explosion of property prices, due to the manipulation of interest rates down to 0.1% by the RBA, and now suffer buyer’s remorse as mortgage rates hover around 7%.
Australians have discovered that house prices can go in a second direction. After previously stating prices would remain at a permanently high plateau, the RBA now forecasts a 20% decline. They may fall even further as unemployment increases, low fixed-rate mortgages revert to high variable rates, and higher food and electricity bills mean less money for mortgages.
With this backdrop, many clients approached us asking how they can get out of their Contracts. Below are some common ways to avoid going ahead:
The Cooling-Off Period
If you didn’t buy the property at auction, you have 3 clear business days in which to change your mind and back out of the Contract.
Unable to obtain finance
If you purchased your property “subject to finance”, you can withdraw from the contract without penalty before a certain date (written in the particulars) if you made reasonable efforts to get a loan. This is not a get-out-of-jail free card. Some have tried pretending they got rejected, and the Courts are very harsh on them, however others genuinely cannot obtain a loan now that interest rates have shot up.
If your Contract is conditional upon building or pest inspections, you normally have 14 days to obtain them. If the building inspection finds ‘a major building defect’, or the pest inspection finds a ‘major infestation affecting the structure’ (usually termites) then you can withdraw from the Contract without penalty.
The magic of contract law means you can do just about anything by mutual agreement, including negotiating with the Vendor to release you from the Contract. If you don’t ask, you don’t get. You would probably have to make a very generous offer. This may include forfeiting your deposit, paying the agent’s fees and legals, or even money for the Vendor’s time. Ultimately, it’s up to the Vendor – they may want to move on in life, and have little patience for your change of mind.
Defective Vendor Statement
Finally, there is the Hail Mary – hoping their lawyer/conveyancer/agent has made a mistake. The Vendor must provide a Vendor Statement outlining the property, rates, notices, and other planning and zoning details. If the Vendor failed to disclose important information or provided misleading or deceptive information, you may be able to withdraw from the Contract without penalty.
If you would like advice on property matters, including conveyancing, contact us today on 9664 4700 or by email at firstname.lastname@example.org
Disclaimer: This publication contains comments of a general and introductory nature only and is provided as an information service. It is not intended to be relied upon as, nor is it a substitute for specific professional legal advice. You should always speak to us and obtain legal advice before taking any action relating to matters raised in this publication.