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For one reason or another, an apartment is considered a bad investment in Australian cities. This is because the demand here isn't huge yet (people in general would rather live outer-city in houses/townhouses), there is a large supply (new complexes constantly being built in every inner-city suburb), and just the general nature of apartments (depreciation, can't do extensions, no real land-ownership, etc.).

I'm a young 25 year old and I make $77,000 a year from my full-time job, plus I do freelancing work and make around $20,000 (after tax) from that. I've saved enough for a 15% home-deposit and have been pre-approved on up to a $350,000 AUD place - around the cost of a 2 Bedroom Apartment on the inner city. Basically, I can afford to get an apartment, and even maintain/pay for it myself.

I really want to buy an apartment on the inner-city near my work. It works well with commuting time, with the lifestyle I desire (I would rent in the city as an alternative anyway!), and meets my requirements (I don't need a yard, I don't need lots of space, and I only want to live with myself or 1 person maximum). But I'm just concerned getting into a loan so early for such an asset could bite me in the ass later, so I'm here for a second opinion.

Some things I have considered:

  • Only get 2 bedroom apartments (not 1), as these hold their value better and are easier to rent
  • Not buying a new apartment "off the plan", because the value of these drops hugely on the apartment complex opening day when a huge influx of supply enters the market
  • The fact that the banks actually do their own research on the apartment you choose before they approve the loan, because technically they are the ones buying the majority of the apartment (therefore, they will only "allow" you to select a half-decent investment)
  • Buying in an area which has good rent demand, meaning when I move out one day it will be easy to rent the apartment
  • Making extra repayments (duh)

With all of this considered, do you think that getting a mortgage and purchasing such an apartment is a better choice than renting? The way I see it, spending $350 a week on repayments is me actually investing something, versus $300 a week on rent just burnt. I know I haven't brought up some of the negative financial aspects (money is lost on interest, depreciation of the unit over time, some large up-front payments and taxes) - but there are also positive things I haven't brought up either (in Australia anyway, you can claim interest on tax as a deduction for example).

My question is more so, is there really any way this could end badly and I'm better off just renting? I plan to live in this city for at least the next 5 years, and if it's sustainable I'm happy to keep ownership of the apartment forever - not just sell it off once I decide to move.

Any opinions on this situation for this financial newbie would be greatly appreciated! Thanks :)

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(therefore, they will only "allow" you to select a half-decent investment)

This doesn't hold up in actual analysis. Look at the 2007 housing crisis (United States and other countries; perhaps not Australia). Banks loaned too much money because they did market analysis. Market analysis looks at comparables. So if the market starts drifting and overpaying, so will the banks.

What you need is a real economic model of the value of the property. But banks avoid trying to do that, as it is too easy to be really wrong. If they are wrong and not lending, they lose the profits from lending to their competitors. If they are wrong and lending, the crash wipes them out. The problem is that it is easiest to do what everyone else is doing. Because then, if you're struggling, everyone else is too.

All that said, the tradition rule of thumb in the US is five years. Less than that and the fees to sell the property outweigh the equity buildup. More than that and the equity buildup outweighs the fees. Of course, Australia's cost structure may be different. Interest and fees may be more or less than in the US.

  • That rule of thumb is quite stupid because it all depends in the property cycle when you buy the property. And considering the OP is in Australia with a different property cycle this rule of thumb is useless! – Victor May 11 at 0:55
  • The Australian regulatory environment is very very different from the US, and the 2007 example just makes this more obvious (AU did not go into recession, overall no decline in house prices or mass foreclosures). But the point about having to do your own legwork to determine if it's a decent investment is a good one! – Fred Stark Jun 12 at 5:13
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is there really any way this could end badly

Oh my, yes. Some apartments in Sydney are now selling at 50% of their peak value. You may think the crash has bottomed out, and you plan to stay in this place a while, but taking on a mortgage commits you to staying there regardless of whether you're correct or not.

Don't forget to include rates and body corporate fees in your comparisons.

And never, ever buy off the plans.

  • Thanks for your comments. I guess I have to make some assumptions in my decision too. A market crash or an unforeseeable drop in value isn't something I can account for - if I do, then logic says to never buy real estate, ever! Ha. I'm in Melbourne just FYI, not that that makes much of a difference. – Johnathon.Ticker2 May 9 at 2:31
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I don't see how you can buy a 2 bedroom unit in Melbourne City for $350K, from a quick search the cheapest I could find was about $440K and about $330K for a one bedroom. So unless you go for a one bedroom, try and find a very run down two bedroom, wait for the market to drop further (which it might not), or increase your budget you might struggle to find a two bedroom unit in the city.

Also, just to correct you, in Australia, you cannot deduct the interest or other expenses from your property if you are living in it, you can only do that if you rent out your property. Also if Labor wins the election there will be changes to the Negative Gearing rules if you buy an existing property after 1st January 2020.

Saying that, you need to do your own research whether it is the right time for you to buy. Generally, it is better to buy when interest rates are at their highs. Usually prices will be at their lows and with little demand for rental properties during these times, rents usually start rising. Once interest rates start dropping your property value will start rising. At the moment we are in a strange situation where prices have dropped even though interest rates are at record lows, with more possible falls to come. Also, as mentioned before, if Labor wins the election property dinamics may get distorted, in the short term anyway. There might be a small surge in prices as demand increases befor the 01/01/20 deadline for Negative Gearing existing properties. After 01/01/20 there might be small drop in demand untill the ratio of rents to property prices becomes more attractive to investors.

Some other things to keep an eye on which might affect property prices are the unemployment rate, international economic activity, prices for commodoties such as iron ore, coal, etc.

And one last thing to keep in mind, if you do buy to live in and then after a few years decide to rent the property out because say you have to move for work (and you rent in your new location and not buy another property to live in) then you can maintain your property as your main residence for up to six years after moving out, and not pay any capital gains if you sell it withing those six years.

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    Thanks for the comments! Not sure what website you are looking at, but here (realestate.com.au/buy/…) these are limited to 2 bedrooms minimum, and theres about 20+ results before the 400K mark - some very small and shit, but some half decent. Will definitely keep your other advice in mind - thanks for the neg gearing tip. Didn't realise you can't do it when you live in it. That's very shit - helping the big guy who owns 10 properties more than the little guy who wants to buy his first place, ha. – Johnathon.Ticker2 May 10 at 7:33
  • I checked through Realestate.com.au! Regarding NG, you are allowed deductions for expenses if you earn income from it, just like you are allowed deductions from your wages for expenses relating to earning that wage. If you are living in it you are not earning an income from it. However, if you lease one bedroom out then you can claim a portion of your expenses. Even if Labor wins & make changes to NG you will still be able to claim expenses against the rental income, but not against any of your earned income from salary or wages - so the expenses can only reduce your rental income to zero. – Victor May 10 at 21:52
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IF your $350k place loses half its value, you'd break even with renting after 67 years as you're saving $50 a week by buying.

I think you've identified the main risks of paying too much at the start, and buying a 1-bed flat which are usually the first to suffer in a housing depression.

I'd also suggest, looking at the style of flat:

  • two similar-sized bedrooms rather than one large and one small
  • bedrooms not opening off the lounge
  • separate kitchen from the lounge, preferably with its own access from the hall

These will give you some more options in taking in a lodger in the second bedroom, or renting to two flat-sharers, in the future.

Also look for square footage. At least in the UK, each generation of new-build property seems to be smaller than the last.

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    So with property prices already falling over the last year and a half you think it is realistic for them to fall another 50% in value, then you don't expect any price movement over a 67 year period. Very poor hypothetical with no substance, no analysis and no thought! – Victor May 9 at 23:04

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