Buying an apartment - downside risk?

yatinsardana

I'm going to be a first time buyer. I think in the next year I should be able to get a 20% deposit for a 1 or 2 bedroom apartment in Birmingham city centre. I live in the same area at the moment on rent and apartments here are quite nice.
My theory at the moment is that my mortgage comes down to roughly the same as my rent so if I can get enough of a deposit, at least some of my mortgage/rent allocated money will be going towards my capital.

I'm 24 at the moment. The issue is that I don't know what sort of downside risks to prepare for? The apartments are quite nice but when I look at their price history, most of them have lost A LOT of value over the years. Most were around 170k in before the housing bubble burst and then went down to 90-100k.
I should also add that around the time they were 160-170k they were new builds then (don't know if that makes a difference to their valuation).

So clearly that was a huge drop. My question is, around 120k, what downside risks should I prepare myself for? I'm talking maybe something like 6-10 year time frame before which I'm probably going to want to move to another property.

I have read up on the housing bubble a fair bit and it sounds like that was one extreme. They talk about us entering another bubble but my opinion is that even if we are, it shouldn't be one quite like the previous one. In that case, I'm thinking of having a worst case scenario of losing 20-25k value in the apartment at the point of selling. Is that a fair?

If so, I can then think whether it still makes sense to buy a property or not? You see my rent right now 600 and mortgage will be around 600 too. So if I lose 20k over say 6 years in property value, well I would've wasted 43200 (600x12x6) on rent in that time anyway.

Apologies if I'm making any obvious fundamental mistakes in my thinking - please correct me if so.

browneyedbazzi

Have you considered how a change in interest rates will affect your mortgage repayments? It may be that payments on current interest rates would be £600, but what if interest rates go up? (which they are sure to do over the next 12-18 months) Will you still be able to afford the repayments?

dimbo61

Things to check out ?
management service charges.
Council tax
How many of the flats are rented out ? Can you rent out your property yourself ?
Local shops ?
How well are the gardens maintained? Do the flats have a sink fund for repairs or major building work ( new roof, Windows etc )

QTPie

Agree with what the previous posters have said:
- consider quite considerable change in interest rates. This can be negated somewhat by getting a fixed rate mortgage, BUT you still have to consider a large rise at the end of that term (say 5 years).
- Service charges. Often these can be really quite high in new apartment blocks: I would expect >£1k a year (probably nearer £1.5k), but some modern blocks can be considerably higher than that.

I think that it is difficult to think of buying as an "investment", but I would strongly considering what your lifestyle is likely to be like for the next maybe 2 to 5 years and try to "future proof" yourself somewhat. Nobody can really foresee what is truly around the corner, but you want to minimise the chances of moving, shorter term, as much as possible - just because of the cost of selling/buying/moving. There have been a few posts on here recently from people who bought 6 months or a year or so ago, bought "too small" and now need more space and to move again. I would really try to go for at least two bedrooms: gives you space, especially if you gain a partner, maybe even start a family OR - if things get financially tight - you can take a lodger.

Mr_F_Dorsetty

yatinsardana wrote: »

I'm going to be a first time buyer. I think in the next year I should be able to get a 20% deposit for a 1 or 2 bedroom apartment in Birmingham city centre. I live in the same area at the moment on rent and apartments here are quite nice.
My theory at the moment is that my mortgage comes down to roughly the same as my rent so if I can get enough of a deposit, at least some of my mortgage/rent allocated money will be going towards my capital.

I'm 24 at the moment. The issue is that I don't know what sort of downside risks to prepare for? The apartments are quite nice but when I look at their price history, most of them have lost A LOT of value over the years. Most were around 170k in before the housing bubble burst and then went down to 90-100k.
I should also add that around the time they were 160-170k they were new builds then (don't know if that makes a difference to their valuation).

So clearly that was a huge drop. My question is, around 120k, what downside risks should I prepare myself for? I'm talking maybe something like 6-10 year time frame before which I'm probably going to want to move to another property.

I have read up on the housing bubble a fair bit and it sounds like that was one extreme. They talk about us entering another bubble but my opinion is that even if we are, it shouldn't be one quite like the previous one. In that case, I'm thinking of having a worst case scenario of losing 20-25k value in the apartment at the point of selling. Is that a fair?

If so, I can then think whether it still makes sense to buy a property or not? You see my rent right now 600 and mortgage will be around 600 too. So if I lose 20k over say 6 years in property value, well I would've wasted 43200 (600x12x6) on rent in that time anyway.

Apologies if I'm making any obvious fundamental mistakes in my thinking - please correct me if so.

Someone earlier on here says 'interest rates' and it is a very important point.

Interest rates have basically been dropping since around the start of the 1980's, around that time Thatcher's government paid 15% to borrow money, right now Osborn pays 2%. Where the BoE rate stands now is the lowest it has ever been basically in recorded history. BUT the average market rate over 200 years is 5%, therefore you can be assured it will rise again.

I also wouldn't get too caught up in the 'buy now or you never will' story. People have been saying that for as long as mortgages have been freely available and guess what, people still buy. They were saying it when I was 18 yrs old and I bought my first house on a 105% self cert mortgage! I soon sold it again for a decent profit as I didn't want to be tied down to a house.

Ask yourself "Do I really want to be tied down in my 20's?" My daughter and her fiancee for example are 22 & 23 years old respectively, they bought a house a year ago. Now they are selling it because they have of course realised they are acting like an old married couple. They are both well educated, they both hold useful degrees and the world is open to them... so they are selling and going to get out of the UK to experience life - as imo everyone should. There's plenty of time to buy houses or other similar boring things later on.

The last thing I'd say is this, the last house I sold was in 2009 in an auction. In that auction there was also city centre brand new apartments because they just couldn't sell them and the developer wanted the cash back.

I watched several sell, they were being marketed for £120k for a 1 bed and £149K for a 2 bed. One guy was trying obviously trying to buy all of them available in the bloc. He was paying £65k for a one bed and £85 to £90k for the two beds at the auction.

There were a few people in that block who had paid the full price. How scary and gutting is that when you have a thumping great mortgage and are instantly in massive negative equity?

So if it were me my list would be;

* Do I really want to be tied down?
* Do I really want to live where I am?
* Do I really have to pay full price?
* If I want to buy, can't I buy something to do up and make money not get negative equity?

Because do remember this. If you buy a property in a phase of properties and your phase is the 1st out of say 4 phases, you will not sell your property at anything like the price you paid until ALL phases are sold and it has all settled down. It's always simple to buy from the developer and it is NEW. Whereas like a new car, drive it off the forecourt and you've just lost a fortune which takes some years to balance out.

These for you are all questions only you can answer for yourself... but as someone old enough to be your father my advice is; do seriously ask them of yourself before you commit to anything, do look for all possible alternatives.

yatinsardana

First of all, thank you alll for your replies! Some really good advice and points to think about. So the general thinking here is that there are things I need to consider.

1) Service charge is around 2k/year, which is quite expensive I know. Comes down to under 200/month. So that would be one thing that I would be paying on top if I were only paying rent.

2) Council tax, utility bills - would be the same regardless of whether I own the property or rent.

3) Change in interest - that seems to be the prevailing issue here. So my calculations tell me that over a 25 year mortgage (ideally I'd like a shorter mortgage because I think I can afford it) at the moment my mortgage will be 500. If the interest goes up to 10%, it will be 900. I will be able to afford that.
Whether or not it will make sense to pay such a high interest on mortgage is a different issue. The argument for that is that interest rates will only rise from here on and will be the same for everyone. So in a few years time, the norm will be anything between 5-10% interest rates and that wouldn't or shouldn't stop you from buying.
The argument against that would be that if your rent is around 600 and at 10% rates you'll be paying 300/month extra (plus 200/month service charge), then aren't you better off saving that 500/month and investing it and making it grow until interest rates come back in your favour, even if it takes 10-12 years?
I'll do my calculations after posting here to see what makes more sense to me but any thoughts?

The only thing to keep in mind here is that I have chosen 10% interest rates as an extreme, in my opinion it will take some time to get to that rate.

4) Future rentability. I would've thought quite good. The apartments in this area don't stay in the market too long. They usually go quite quickly as long as they are decent. But yeah I'm aware there's always that risk of it not renting.

5) Buying a 2 bed apartment and renting the room out - So that was my thinking initially. My calculations are based on me being able to afford the mortgage myself without any help and that I can. Obviously any help from a lodger would be appreciated.

6) The only thing I want to clarify here is that this apartment would primarily not be for an "investment" as such. I'm no expert in the property market and I'd much rather make my investments in the stock market where I'm more comfortable. This idea was solely to address the point that every month I'm paying 600 for rent which is essentially going down the drain for me. Instead, if i could get a decent deposit, could I spend the same amount or even a little more where at least some of that will be adding to my capital? I'd be very very happy if at the end of 6-8years the property is still valued at what I bought it at. I'm not even thinking of an increase. On the flip side I want to prepare for a drop in the price and that was my worry - how much is a city centre apartment that was first sold at 170k, then dropped to 90k and now valued at 120k, really worth? (I don't expect an answer to that as I gather it's difficult to say)

7) Mr Dorsetty - thank you for your reply. I have addressed some of your points in the above comments. Your story about the auction is a little scary and that is exactly my point though. How do you work out the real value of that apartment i.e. the price at which it will come and settle in a stable market. The prices here in the city centre have been all over the place. I think my general opinion is that builders often charge a premium and almost always after a new development is sold initially, the price of it comes down. But that begs the question that if these apartments were sold for 170k full price, at 120k aren't they a bargain?
Like any sane person, I don't want this decision to be the worst decision and be in negative equity right from day 1 more or less. I take your experience on board.

In regards to being tied down, my profession is such that I will be here for the next 8 years or so at least (probably more). So geographically I'm happy to be tied down here. In terms of family life, I don't see myself get married for another 5-6 years. Regardless, I want to get a 2 bed apartment that will suit the two of us at least in the first year or so but then move on. But I think that thought would require more consideration on my part.

I have got a good range of things to consider from the advice all of you have given. I will do that right now and see whether or not it makes sense to buy right now. Thanks all!

Mr_F_Dorsetty

yatinsardana wrote: »

7) Mr Dorsetty -
Like any sane person, I don't want this decision to be the worst decision and be in negative equity right from day 1 more or less.

That's all good - as for pricing: more difficult.

Many people will disagree with me but myself I have learnt to play safe over the years. It is highly probable that the UK will have a recession all on it's own in around 5 years time, it is also probable that the UK will default on it's debt. It is also probable that the £ will crash.

So, if I were looking to buy anything now I would be looking to buy it at a much reduced rate in an auction - anyone can do this.

Just get you're cast iron mortgage promise in principle for whatever amount you deem reasonable and then arrive at the auction and buy something. Talk to the auctioneers before starting down this route as they know all the answers and will happily advise you of the process. Also talk to your likely mortgage supplier and a solicitor. It is easy enough but not simple - but if it were simple everyone would do it but they don't.

If you can buy a repossession say at 65 or 70% of market value then you're playing safe and sensible and do remember that

" The basis of all good real estate deals is someone else's misery..."

Don't be the mug who paid full price and got caught. Don't be the person who believes the estate agent or builder. I've always looked at auctions like this: you can't really lose. If I was stupid enough to buy it for £60K someone else will as well because I am not that dumb.

I wish you well in whatever you decide to do but my advice is always the same about anything you buy - do not be a punter - look for the angle and take it. :cool:

Building_Surveyor

Where in the city centre are you looking? My brother rents a 1 bedroom apartment in the mailbox in the city centre. Most are owned by investors. Whilst it's great for the bachelor life for a few years no doubt he'll soon get bored. Parking is a nightmare too. If you've got one car, fine. But if you ever want to move anyone in or visitors forget it, it will be pay and display all the way... If children are on the horizon in the next few years, forget that too. Schools near the centre are crap, no one in my brothers block has kids, it really isn't that kind of living.

Like I said city centre apartments are usually investors forte

yatinsardana

Mr_F_Dorsetty wrote: »

That's all good - as for pricing: more difficult.

Many people will disagree with me but myself I have learnt to play safe over the years. It is highly probable that the UK will have a recession all on it's own in around 5 years time, it is also probable that the UK will default on it's debt. It is also probable that the £ will crash.

So, if I were looking to buy anything now I would be looking to buy it at a much reduced rate in an auction - anyone can do this.

Just get you're cast iron mortgage promise in principle for whatever amount you deem reasonable and then arrive at the auction and buy something. Talk to the auctioneers before starting down this route as they know all the answers and will happily advise you of the process. Also talk to your likely mortgage supplier and a solicitor. It is easy enough but not simple - but if it were simple everyone would do it but they don't.

If you can buy a repossession say at 65 or 70% of market value then you're playing safe and sensible and do remember that

" The basis of all good real estate deals is someone else's misery..."

Don't be the mug who paid full price and got caught. Don't be the person who believes the estate agent or builder. I've always looked at auctions like this: you can't really lose. If I was stupid enough to buy it for £60K someone else will as well because I am not that dumb.

I wish you well in whatever you decide to do but my advice is always the same about anything you buy - do not be a punter - look for the angle and take it. :cool:

How do I find out about these auctions and where they are?
There must be different types of auctions running around, are there any ones that are more reputed that others? It will be nice to go and see the process for experience at the moment anyway.

yatinsardana

Building_Surveyor wrote: »

Where in the city centre are you looking? My brother rents a 1 bedroom apartment in the mailbox in the city centre. Most are owned by investors. Whilst it's great for the bachelor life for a few years no doubt he'll soon get bored. Parking is a nightmare too. If you've got one car, fine. But if you ever want to move anyone in or visitors forget it, it will be pay and display all the way... If children are on the horizon in the next few years, forget that too. Schools near the centre are crap, no one in my brothers block has kids, it really isn't that kind of living.

Like I said city centre apartments are usually investors forte

I'm looking at watermarque or king edwards wharf or liberty - it's on the other end and other side of broad street as mailbox. These apartments are towards the five ways side, behind brindley place.

Parking is a nightmare. Although you're right in that if you have one car, you get allocated place anyway. In my apartments, it's no problem at all for guests to park as there's ample space in the parking lot.
I definitely don't want to live in the centre when I have a family with kids. I agree that the centre is mostly for investors .. I suppose I should really think before I decide to dive into the sea amongst the big fish!
Thanks

ognum

Read the lease of the property you offer on carefully! I hate to suggest that because you are 24 you should ask someone with more experience to read it as well but it depends on how much you understand of leases.

Be prepared to withdraw if there are clauses in the lease you do not like or understand.