Am I Making a Poor Financial Decision to Purchase an Apartment in a Melbourne City Suburb Vs. a House Further Away?

bulbasaur on 01/03/2022 - 13:15

I enjoy living in a city suburb and close to all city amenities, but I've also noticed that the apartment prices around me are plummeting (e.g., they are the same sale price or up to $100 k less compared to 10 years ago). I assume this is a symptom of all the new apartment buildings going up in the area. My concern is that apartments in Australia seem to be designed for rental yields and not capital gain, so it makes little sense to buy one and live in it as the owner.

My alternative option is buying a stand-alone house in a suburb 15 - 20 km out of the city, but I'm not entirely sure I want that lifestyle (I'm a single male in my early 30s, so maybe I will in 10 - 15 years?). Basically I see my options as:

Apartment = enjoyable lifestyle near the city but no return on my investment or even a negative return.
House = less desirable lifestyle far from the city but I own the land which tends to always appreciates in value and may give me more options when I'm older.

I'm currently 30 and earn close to $110 k a year - I would like some advice on what you think I should do? Or who I should talk to?

Financial

Comments

  • geek001 on 01/03/2022 - 13:21
    +33

    If I were in your shoes, I would probably buy a house in the suburbs and continue to rent an apartment in the city using the rent from the house. That way you can have the best of both worlds? What do you think?

    • bulbasaur on 02/03/2022 - 11:04

      I hadn't considered this - the house location could be very flexible if I take this option!

  • peter05 on 01/03/2022 - 13:23
    +3

    Where you live and where you invest are not often aligned.

    It depends on the city you're in as well, Melbourne has too many apartments coming up but in cities like Sydney, apartment prices can have similar movement to house prices. I'm not familiar with any other cities but unless you're in Sydney I think all the other cities would see higher growth in house vs apartment.

    You only need to live in the property you purchase for 1 year to reduce your tax liabilities when you sell, so make use of that and then move out to where you really want to be.

    The only bonus of buying where you enjoy it is that even if the investment doesn't pan out, at least you enjoy living there. However are you sure in 10, 20, 30 years time you'll want to be in that apartment? Only you can answer

  • kanmen on 01/03/2022 - 13:23
    +1

    Where exactly are you thinking of buying outside of the city? Like Chadstone or Point Cook?

    • bulbasaur on 02/03/2022 - 11:03
      +1

      Currently been looking at Preston, Reservoir, Macleod, and other northern suburbs 15-20 km from CBD

  • Drakesy on 01/03/2022 - 13:26
    +5

    Apartments will never have a capital gain, they're similar to technology, only ever depreciate as they are outdated by newer apartment builds.
    Yes buy it for a rental yield, but not a capital gain.

    • blocky27 on 01/03/2022 - 13:31
      +2

      Um can you actually give any evidence that apartments don't see capital gains? Because pretty much everything within 20kms of Melbourne & Sydney have appreciated considerably over the past few years.

      • Drakesy on 01/03/2022 - 13:38

        It's fine until there's an oversupply,
        Perth has had 1000's of apartments completed over covid and they're struggling to sell resulting in a liquidity squeeze.
        Sydney house prices have just turned negative for the first month in a while and with increased interest rates the upside for this is rapidly diminishing.

      • p1 ama on 01/03/2022 - 14:42
        +6

        Basically there's two forces at play. Any residence is building + land. Generally, the building depreciates over time, and land appreciates over time, so therefore, what really matters beyond anything else is what percentage of the value of your residence is building and land.

        In well established suburbs, you might find that the ratio is something like 75% of the value of your property is land, in the new further out estates with new houses, it might be something like 50%, with an apartment in a high-rise, it will be something like 10%. Basically, as long as new apartment towers will continue to go up, the appreciation of apartments will not be able to match that of houses in the suburbs.

        That doesn't mean that one should not consider purchasing an apartment. I actually think that a lot of the housing crisis we see right now stems from the fact that people are so terribly averse to living in apartments (you can get really livable 2BR apartments close to the city for < $400k), and that people are now buying houses as a speculative asset, not in order to live in.

    • oO0Dam0Oo on 01/03/2022 - 19:30
      +3

      And don't forget issues with strata management, fees etc. Very little control over your asset if and when things go wrong.

    • [Deactivated] on 02/03/2022 - 07:57

      Apartments will never have a capital gain

      Bull$#!t.

      As always it depends on location.

      Source: former apartment owner who has made a CG…

  • JimmyF on 01/03/2022 - 13:34
    +1

    Apartments are cheap as not many people want them. As to if they will rebound in price, maybe so as long as you don't want to sell anytime soon you'll be ok.

  • Diji1 on 01/03/2022 - 13:54
    +1

    If it's an investment you want to buy what most people want and can afford so that you have highest chances of yielding.

    I think this is still median value two or three bedroom unattached house on property.

  • soob on 01/03/2022 - 14:07
    -3

    When you own a house you own land, it will always appreciate, when you own an apartment you own that cube of concrete only. You're in the minority regards your lifestyle choice.

    • Typical16-bitEnjoyer on 01/03/2022 - 14:39
      +1

      Always? I know a few peeps in Karratha that would disagree.

      • pharkurnell on 01/03/2022 - 15:35

        Also Wittenoom

      • Drakesy on 01/03/2022 - 19:40

        Shhh
        The eastern Staters don't know what it's like for property to be worth less than what you bought it for.

        They only think it goes to the moon.

    • blocky27 on 01/03/2022 - 15:40
      +3

      Uh no, you own a portion of the land underneath of the building too

  • KaTst3R on 01/03/2022 - 15:07
    -1

    You can consider the contrarian view. Since most are thinking like what you have described, investors are looking to offload apartments now. It is a very special time for major cities because the key demand for apartments are students and they will start to return slowly. So this could be an inflection point and you can get an apartment cheap. Negotiate hard.

    As a rough method of valuation, it will be amazing if you could get a 3-4% yield on an apartment. So the price you expect to pay in theory is Current Annual Rental Return divided by 3%. For example if the 2 bed apartments in a block can reasonable obtain $450 per week, the Price = (450x52/0.03) = $780k. This is a very rough estimation and have not taken into account of tax. It gives you a sense of how over or undervalued the asking price is.

  • ausdday on 01/03/2022 - 15:16
    +1

    My take on CBD apartments are normally for investment purposes, i.e. rental.

    Just like other investment tools, yield determines the price. When Australia economy is booming, we have more people coming in (students, expats, residents, etc.), which drives the demand of properties in CBD up. The demands drive the apartment rental price up, and thus the yield.

    In pandemic, demands for rental drops, and thus rental price. When rental price goes down, the yield drops and thus people aren't willing to spend big money on buying those apartments.

    As for houses, they are usually for long term residents. As long as Australia has population growth, the demands will always be there.

  • Porker on 01/03/2022 - 15:24

    City will give you the lifestyle you're after. A house will help with the future.

    Which do you value more?

  • FirstWizard on 01/03/2022 - 15:55
    +1

    I'm in my early 30's, single, and get paid around what you get.
    A few months ago I pulled the trigger on a 1-bedroom apartment in Sydney (in the City of Sydney council).

    Was the same thought process I went through, as, for the same price, I could buy a 2-3 bed house in a suburb 1h away from the city and embrace a lifestyle I never want to live.
    So, though quite a number of people disagreed I went ahead. I have never been happier.

    YOLO, so I didn't want to spend the best part of my life doing something I'm going to regret in the hopes that future retirement would be better when the property appreciates.

    My mortgage+rates+strata is only about $50/pw more than the rent I was paying for an apartment in the area.
    This is not going to be the only investment I'm going to do for my future. I hope to continue saving money as I did in the past 4 years to make my entire deposit.

    But I guess if the place you live in is going to be your sole investment for the future, maybe a house would be a better option?

    • Quantumcat on 01/03/2022 - 16:11

      Wouldn't it have made more sense to continue renting? You would be $50/week better off, plus maybe even better off than that as you may not get back what you've paid in principal and interest when you sell (depending where in Sydney, if new apartment buildings get built nearby or not). As well as the financial benefits you have the option to move easily if you have a horrible neighbour or want to move cities or get a different job. The benefits of owning are that you can decorate it how you like, put picture hooks on the walls, and not be told you have to move, which is good too

      • FirstWizard on 01/03/2022 - 16:26
        +1

        I think I did that math. Even if I sell the apartment at 50% of the purchase price at the end of the 30 yr mortgage, I don't make a loss compared to renting.
        Please correct me if I'm wrong.

        — Provided interest rates don't go crazy high and or the potential return on my initial deposit if I invested it elsewhere has immense gains.

        As well as the financial benefits you have the option to move easily if you have a horrible neighbour or want to move cities or get a different job.

        This is very true.

        The benefits of owning are that you can decorate it how you like, put picture hooks on the walls, and not be told you have to move, which is good too

        Exactly.

        However, who is to say that I'll keep this place forever? Maybe in 5 years, I will change my mind look for different options. So far I'm doing what I enjoy doing, and living where I want to be, and not where I could afford a house at.

        • Quantumcat on 01/03/2022 - 16:32

          Compared to renting + owning a 2 bed house in the suburbs & renting that out, or renting + share market / etfs with your deposit money?

          • FirstWizard on 01/03/2022 - 16:35
            +1

            @Quantumcat: The latter :D

            The former did look appealing. But was too risky to me at the time. ETFs were much easy to deal with.

    • peter05 on 01/03/2022 - 16:15
      +2

      as noted above, there are gains to be had in sydney for apartments but it appears to be the only australian city that experiences this. It probably is related to your choice between an apartment in the CBD vs 1 hour out from city.

      other cities haven't reached this critical mass of demand in the apartment market yet.

      • FirstWizard on 01/03/2022 - 16:51

        Yes, I think I totally agree with you on the point made above.

  • kingsville on 01/03/2022 - 16:30
    +1

    What about a townhouse/unit?
    That way you could stay closer to the city.
    Best of both worlds?

    • bulbasaur on 01/03/2022 - 17:04
      -1

      But you don't really own the land under a townhouse in the same way you do under a detached house, as far as I understand?

      • jjjaar on 01/03/2022 - 18:05

        Sometimes you do. If you’re just sharing a wall it’s usually two completely separate titles. Maybe shared insurance for that wall/if the roof is shared, often not.

      • Drakesy on 01/03/2022 - 19:41

        It's better than an apartment when you own a patch of air.

  • Sleeqb7 on 01/03/2022 - 17:11
    +2

    Yeah I had this choice for a bit too.

    3br house in not great area 45 min drive from Brisbane City (And 5 minute drive from groceries), or a 1br apartment 10 minutes from the city (And 100m walk to groceries, pharmacies, restaurants, cafes, bar, etc).

    I saved $50k and I went for the apartment, which conveniently has increased in value about $50k over the last 5 years. The only reason being that mine was at the very bottom of the pricing ladder. A new apartment building went up across the road, all the apartments started at $100k more than my place cost, so the lower cost apartments all increased in value because the demand for cheap places still existed.

    The logic at time of purchase was that even if it didn't increase in value, I was still building equity. I didn't want to sacrifice my lifestyle in favour of a better investment. When in your 20s it's easier choice. To be perfectly blunt, the only thing I would change is I'd get a 2nd bedroom and maybe a small courtyard/balcony. Still can't beat the location, and when the world stops ending I look forward to regularly attending live music again. Something that would be much less tenable with a 45 minute Uber/Taxi/Etc home.

  • this is us on 01/03/2022 - 17:54
    +8

    Not a popular opinion but I've bought an apartment off the plan a few years ago, in Melbourne (5 minutes from CBD by train). It's a nice location with everything that I like in walking distance. I was able to modify the floor plan and create the apartment that I wanted, with the rooms that I wanted, including a nice butler's kitchen and another room for hobbies.
    I'm a bit picky and couldn't find a decent house for less than double the price I paid for the apartment. I was also able to remove horrible bathtubs, which are useless.

    As an investment, it's a poor financial decision, but not everything in life is about making a good financial decision. I wanted a place that I could design, close to the places where I like to go. I don't have to drive. I feel at home every time I go back to my place (I'm currently working interstate), I love it, and I'm proud of it. I can decide to go out for dinner without planning and just walk 5 or 10 minutes to my favourite restaurants, drink a (few) glass (es) of wine and come back home without nauseating Uber rides. I can try different restaurants that are 5-10 minutes if I use public transport.

    The alternative with the same amount of money would be buying a house far away, in an area where I will need to drive/Uber or rely on longer trips using public transport, which would make me lazy and tired, and consequently I'd avoid leaving home, meeting friends, etc. I enjoy being home with my partner, and having friends over.

    Moreover, being a tenant in Australia is horrible, you can't feel at home… ever… You can't paint a wall, you can't hang a painting, you have to open your house for invasive inspections every 6 months, you can't have a pet… And you should always expect to be notified that you have to leave after 3/6/12 months, because the landlord doesn't like your face, or because they wanna sell the house. Being a tenant in Australia can be one of the worst experiences a human being can have in life. Unfortunately, many Australians will never be able to experience owning the place where they live.

    Having said that, I don't regret buying an apartment, but I also don't expect capital gain. Because the apartment was customised, I'd have to find the right buyer, but, again, it's my place, I love being there, and happiness is priceless.

  • theguru1 on 02/03/2022 - 07:50

    Yes.

  • [Deactivated] on 02/03/2022 - 07:54

    Owning an apartment, imho, is no longer wise.

    Why? Cladding and structural damage (typically long standing faults) and the lack of protections as underwriting agencies go under and/or contracts not honoured.

    Don’t get me wrong, I love apartments and apartment living (mostly… except when it comes to noise issues and people nicking my parking spot!), and would probably buy one if I became a multi-millionaire… especially in Melbourne.

  • ascotno1 on 02/03/2022 - 08:28

    Given that the city has been somewhat abandoned for the last couple of years due to covid, I would think property values will remain low. And it's very likely that the CBD will take a long time to recover if it ever does.

  • 2esc on 02/03/2022 - 09:25
    +1

    Where do you live? Buy as close as possible to your work commuting to work takes up valuable time. This will give you more time to enjoy life. Yes long term returns are important but you have to enjoy today because tomorrow you might get hit by a bus.

    Buy what's closer to your work excessive time commuting is stupid.

    • bulbasaur on 02/03/2022 - 11:11

      Yes, I hate commuting. Although with the new normal I probably only need to go to the office twice a week.

      • Mugsy on 02/03/2022 - 11:24
        +2

        If this is the normal going forward for you, I would seriously consider buying a house in the outer suburbs instead.

        Even though I'm in Brisbane, I've always been use to living in the inner city suburbs due to working in the CBD for most of my life and that location being where i foresee the rest of my career will be centered around. However, my Mrs works and has lived in the outer suburbs so when we decided to go serious, I moved out to the outer suburbs. If you're lucky and find a public transport route with an express service into the CBD, it's not too bad to commute, you'll be able to get a house with more space to set up a home office, and if the area has a vibrant community, you won't be short of good food options either. A good location with good access to the CBD, good schools, and plenty of amenities will always be sought after and hold its value.

        Or, as some have said, consider buying an investment in the outer suburbs that you can rent out for more than it'll cost for you to rent closer to the city if you really want to live close to the CBD still, and if the location works for you when you move to the next stage in life, you can move into the property.

  • Mugsy on 02/03/2022 - 10:16

    It's interesting to read how the unit and house market is down at Melbourne… unit market different in Brisbane. It dipped a bit a few years back but has been on the rise since mid last year when townhouse became unafordable for many FHBs. Anyone who bought a 2brm unit a year ago has probably made $50k to $75k depending on the quality and location… and units are still on the rise for the rest of this year (well, those not flood affected at least). I guess when older 2brm units were hovering around $300k 2yrs ago, there's room for capital gains still.

  • sam-1966 on 02/03/2022 - 16:52

    I don't know Melbourne at all, but this is on the market:

    https://www.msn.com/en-au/lifestyle/smart-living/ex-pm-julia…

  • OzHunterNSW on 02/03/2022 - 17:48

    So you want to commute 20k x 2 = 40k per day through Melb peek traffic. To what…
    Whereas in the city, you walk to work, enjoy all the entertainment and …. get to leave on weekends to anywhere your heart desires.

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