Australia: Sydney Market - To Sell or not To Sell our apartment!?

[Tin Foil Investors]

Hi Fellow Mustachians,

Whilst very clean shaven on this forum my partner and I have been reading MMM for some time now and have adopted many of the principles with ease as they make perfect sense to us!

The only thing we keep going back and forth on is if we should sell our apartment. We seem to change our mind on the daily! Here are the details:
- Apartment in Meadowbank, Sydney, 2 bdr, 1 bath, 1 car, 58sqm total
- Purchase price $566,000AUD - Oct 2015
- Stamp duty paid at purchase $22,000, legal $2,000
- owner occupied (we now live in our apartment but bought it with tenants seeing their contract out for the first 4 months @ $390p/w)
- deposit paid was just shy of 18% (roughly 100k to memory) - current equity, around 110k including 16 months contributions
- mortgage repayments: split loan 75% fixed (5 yr term, roughly estimated exit fees of $3k) at 4.59%pa and 25% variable sitting currently at the same rate (hasn't moved in 12 months) total weekly repayment: $605
- expected sale price of $600,000-$610,000

Here's why we think we should sell:
-We're quite risk adverse and the current housing market is volatile with both China and Australia closing its doors slowly to foreign investments (huge source of demand in Sydney market) and there being a large supply of apartments hitting the market in the last quarter of this year. The banks (I have access to high level financial newsletters through work published by the bank) are also predicting a market normalisation beginning in the last quarter of this year alongside policy changes coming into effect this year lowering demand and the large supply of new expensive apartments hitting the marketing in Q4.
- A big Mustachian principle is don't buy where it is cheaper to rent (roughly and over-simplified i know), and unfortunately we could rent our place for less than the INTEREST portion of our mortgage. The difference here is a genuine loss, not to mention the council and strata rates ($560 per quarter) pushing it further down. We could currently rent this place out for around $410 pw, however we would also pay that to find somewhere to live ourselves roughly. Negative gearing doesn't benefit us greatly as we aren't huge earners.
- If the market does plateau we are going to lose the equity that we put into the apartment (which is the scary part for us risk adverse rookies) even if the cost of interest is similar to the cost of rent and we lose roughly the same amount with staying or going we would at least have our equity liquid and be able to seek out better ventures that could likely have greater return.
- This is not our forever home, it is a small 58sqm apartment, very close to transport but definitely wouldn't be able to raise a family here for very long, which means staying is less desirable when if renting we can upgrade as needed or until we decide that we are ready to buy again and have adequate equity to make it worthwhile. 
- As it currently stands our combined wages after taxes are $1750 pw, if one of us were to lose our jobs, or say fall pregnant, $600 per week is a very large chunk of our then $900 (assuming I lose my job or fall pregnant and not my partner which in that case would be $850) weekly pay. Whilst both at work we can afford this no worries, however, the inability for either of us to go part time and the large portion of our wages that goes to our mortgage does concerns us.
- some smaller personal notes; we want to start a laser cutting business and the lack of outdoor DIY space (and space in general) is prohibitive. I also have wanted an animal for some time now and in this apartment i doubt that will ever happen - sad face - no biggie but I'm not one to sit idle while 'circumstance' stops me from having something that I want when I'm more than happy to work for it.


Here's why we keep thinking maybe we shouldn't sell and just stay:
- the value of the property has increased nicely over the past 16 months, there's likely still a little more wiggle room in the market
- this would give us the time to gain the capital in order to do a few more DIY reno's so that we may be able to squeeze a bit more from the market. Fresh flooring ($2-3k) and a new bathroom vanity ($250-300) could push this place into the early $630k market here in meadowbank in comparison with similar and recent sales.
- there are multiple new complexes going up a few blocks away, supposedly once these fill and there is no more supply, the price will go up for the older apartments on the other side for those who missed out with the big bidders over at the flash new mega complexes. Not sure if this is true but it does make sense alongside general laws of supply and demand as there is currently low supply in meadowbank until these apartments are finished, however they are large, newer and roughly twice the price.
- super close to transport, convenient, we see the potential to live here happily for a few more years (but ultimately are undecided on the risk element of staying)

So what do you think fellow mustachians!?

Should we go back to renting and release ourselves from our constant decision loop and play with other ventures, or should we stay and see the market through in the hope of further capital gains?

Any help would be greatly appreciated

Cheers

The Tin Foil Investors

[marty998]

Meadowbank is a pretty good spot for transport options, but it's a very dense area with lots of new shiny blocks going up there and in the surrounds. Are you in an older style 1 bedder or one of the new ones?

Some considerations:

- If you sell you may be liable for CGT because it was rented out for a while. Seek specific tax advice form your accountant, as there may be ways to avoid it, or reduce it
- Your equity today should be higher than you've listed, unless you're are including stamp duty as part of your 18% deposit? Did you pay LMI as well? Probably not relevant now as it is a sunk cost that you'll never get back.
- You'll be up for rough guess $10k at least in selling agent fees is you decide to sell

This is hard to advise to be honest. It's going to be so difficult for you to get back into the housing market because you'll have to eat stamp duty again, save up a bigger deposit etc etc. Unless you are moving to the new suburbs being built in the outer south western suburbs

Everyone knows there's an apartment glut coming, but hey, that's just 2018. I'm going to be holding my Sydney units out to 2050 and beyond. Not really fussed about short term blips that were to occur.

You may get a more considered (but not exactly MMM) type response on PropertyChat.com.au

[Tin Foil Investors]

Thanks for your response marty998!

- A small portion of our capital gains will be taxable correct. 4 months out of duration will be converted to a % of the total capital gains and this will be taxed. Overall not so bad.
- Yes we paid LMI unfortunately of 5k as we couldn't raise the other 7k required in time to get the apartment - so close to that 20% but just didn't make it there. deposit would have had to be 112k roughly to escape LMI but we only put in 100k deposit and have paid roughly $180 of principal each week for 16 months, bringing our equity back up to around 110k at present.
- we have some interest privately that we will explore but otherwise will have to list and incur that cost yes.

We were initially going to play the long game as well, and in that sense I think it's possible that we may be getting a little spooked by all of the 'market crash' talk and to be fair no one can ever really know 100%.

The only other glaring thing that makes me think we made a bad choice is that we can rent a similar place in this area for around the same amount as the interest portion of our payment -$420 p/w. But then we have less risk and all of our equity in hand. Although as you say when we want to get back into the market we may have trouble.

Many thanks for the link I will have a look there too.

[marty998]

Over time your interest cost will reduce - I assumed you were paying extra into the mortgage while you have the benefit of a dual income, but appears you've just been paying the minimums?

I honestly can't figure how some investors are coping with the ultra low yields. You are right it is theoretically better to rent than own, but if prices are going up 15%+ a year on $500k properties then people can stomach the cash losses.

It's a terrible dilemma. There'll always be a niggle of doubt no matter what you choose.

[former player]

The one thing you can control here is whether or not you become pregnant.

I hate the term "fall pregnant", as though it's something that comes down from the sky like a meteor and we have no control over it.  Please, own your body, own your choices and if you do become pregnant acknowledge that it is because you made the decision to become so.

[Tin Foil Investors]

We have been repaying the minimum but have a 100% offset on our variable portion of the loan. It doesn't seem to vary too wildly though as most of our incoming is coming out in spending.

True the interest portion will decrease over time. It's possible that we can continue to save further after this year as we have been spending a lot recently. A big holiday last year, a wedding this year. I think by next year we will feel a little more flush with cash but large expenditure is adding to that niggle that you so correctly mentioned.

The other option we were thinking about was to rent in sydney but invest in property elsewhere (after rebuilding another 20-30k in capital which would be around 2 years for us), like the central coast. Around there we could grab something in gosford<->tuggerah for under 400k where our deposit would mean rental would be close to positively if not certainly positively geared. Even with another lot of stamp duty it would be a better investment seeing as it gets a return that doesn't entirely rely on capital gains.
Equally if we got out of this apartment in current market we would make back everything that we have paid and break even, all stamp duty fees etc. So we would sort of be geared to look at other options like that. Or out west.

@former player
I do see my omission of the word '"choose" to fall pregnant' to open the opportunity for you to assume that it would be anything other than a choice.
However where family planning comes into play, if my partner and i together decide to fall pregnant it inevitably means some time off work - which is something we both want, and comfortably that means good investment choices.

[Dicey]

You might want to try the two circle technique that was introduced elsewhere on this forum. Draw two imaginary circles. Step in one and imagine how you will feel if you sell and the market continues to rise. Then mentally step into the other circle and imagine how you will feel if you sell and the market tanks. This is just an exercise to help you think things through. The reality is that real estate is a long time horizon game. You're giving yourselves the heebie-jeebies, which may or not prove to be legitimate.

If the building boom is expected to be short term, your home that is more bang for the buck is likely to feel upward price pressure. Personally, I'd update the interior as cost effectively as possible so that you will be in better position to compete with the new properties. And then I'd wait, living happily in my newly renovated home.

[former player]

@former player
I do see my omission of the word '"choose" to fall pregnant' to open the opportunity for you to assume that it would be anything other than a choice.
However where family planning comes into play, if my partner and i together decide to fall pregnant it inevitably means some time off work - which is something we both want, and comfortably that means good investment choices.

I'm sorry if my rant offended.  The feminist in me gets upset when women in developed countries with access to contraception fail to take the control they should over their own bodies, and think that this is often because of unspoken and outdated cultural pressures about the sexual and childbearing role of women which are revealed by the pre-contraception phrase "fall" pregnant.  I'm entirely happy that you and your partner will factor informed choices into your planning.

[Tin Foil Investors]

You might want to try the two circle technique that was introduced elsewhere on this forum. Draw two imaginary circles. Step in one and imagine how you will feel if you sell and the market continues to rise. Then mentally step into the other circle and imagine how you will feel if you sell and the market tanks. This is just an exercise to help you think things through. The reality is that real estate is a long time horizon game. You're giving yourselves the heebie-jeebies, which may or not prove to be legitimate.

Diane, Thanks so much for this. This sounds like a really great exercise as there's so much emotion flying around when discussing this sort of thing with my partner.

Many thanks.

[Tin Foil Investors]

Thanks so much for your help so far guys!

It's so encouraging to speak with other mustachians who can understand the basis and principles of some of the decisions we are making. We struggle with some other advice including, get a credit card to help make bigger purchases now and pay off over time (no!) and other advise that includes more risk and more spending!

I would be interested in a discussion around good areas to actually invest in Sydney, if there are any.

Cheers
Tin

[Adventures With Poopsie]

I am following here very interestedly. I know nobody can predict a price correction but I am always interested to hear people's thoughts. As I want to buy again, I hope a correction comes (not in Sydney mind you, looking elsewhere), but I don't have much hope one will.

[Tin Foil Investors]

This has evoked a lot of really good conversation for my partner and I though. I think we're pretty settled on keeping it for a few more years and renovating to a high standard slowly over time and then likely renting it out.

The rental market in the area is slowly climbing as well. By the time we have outgrown the apartment we will likely get a better return for it (particularly if we renovate to "high spec") and enjoy those renovations ourselves until we need more space and decide to move.

I still think Sydney is really expensive in relation to proportion of pay. But it's better than having a property you can't move on the market or rent if you actually wanted for the moment i suppose. I'm sure being on the lower end of apartment prices it will still sell when we go to do so. But the long game is better where property is concerned as some have mentioned.

cheers

tin

[marty998]

Economics writer Greg Jericho commented on the extremely low inflation numbers reported again today. Said the data continues to puzzle and movements of various benchmarks aren't making sense (e.g. the $A response to the release of the numbers).

I really wonder what the RBA's thoughts are, and what it means for interest rates... we will find out following the meeting in a couple of weeks time.

Spidey sense tells me that since everyone thinks this is the "new normal", something out of the box is bound to happen. Especially with medians in Sydney now at $1.1m, APRA lending restrictions aren't really having an impact.

[Tin Foil Investors]

Very true Marty.

APRA lending restrictions can't really hold the banks back with their new found collusion on 'fuck the RBA lets raise rates anyway' gag. The APRA regs more protect consumers from being able to sign onto super dodgy high risk loans by forcing the banks to do due diligence.

That's not a bad thing tbh, the APRA regulations.

Here's hoping that the market holds out for another 12 months!

Here's on for you guy though. Canberra, not a lot of capital growth at all compared to other areas but really reasonable buy in costs with a nearly 6% rental yield. Me smells a possible investment in the making....
Anyone looked in to this very much at all? We're at the very beginning of sniffing this out as a possible future investment.

Cheers

Tin

[bigchrisb]

I live in Canberra.  Canberra has a number of sub-markets, both in area and in demographics.  Housing prices have been pretty divergent here dependent upon the sub-sector.  For example:

My house (inner ring suburb, technically a dual occupancy, has about 550m2 of land itself) has experienced 33% capital growth over the last three years.  My wife's apartment (older apartment, core location) has seen a capital loss of about 6% over the same time.   

The crane test (looking to see how many cranes are on the skyline, and what type of building is being constructed) suggests that there are a lot more apartments to be added to stock over the next couple of years, in what I would argue is already a pretty saturated market. 

Canberra is also a bit of a one-industry town.  Its property fortunes tend to follow what is happening in government, and if people think that is likely to expand or contract.

Also, if investing here, do your due diligence on the particulars of the Canberra market.  Two you should know about are:
- Stamp duty is tax deductible for property in the ACT, as the land is leasehold not freehold.  This is a plus.
- The ACT has substantial land taxes and rates, along with a phase up of these over time to remove stamp duty.  Make sure you understand what these are likely to look like, and how this might effect the real yield on your investment.

Good luck!