Your guide before buying an apartment

Units might be poised to lead the market, but there are things you need to know before you buy, writes Nathan Mawby.

APARTMENTS are poised to outperform houses as Australia endures its first upwards interest rate cycle in years. This is great news for buyers looking for something affordable, easy to maintain and well located.

But apartments do come with extra costs compared to houses, so buyers need to do more due diligence before committing to one.

So what do you need to know before you buy one?

APARTMENTS’ TIME TO SHINE

Traditionally houses and units gain value at about the same pace, but house prices outpaced the rest of the market during the pandemic. Now units are tipped to catch up. In June, the PropTrack Home Price Index showed a more than 7 per cent gap between house values (10.1 per cent) compared with units (3 per cent).

The July Index showed the gap was down to 5.8 per cent, with houses growing 9.5 per cent and units 3.7 per cent in the 12 months to July 30.

PropTrack economist Paul Ryan said with units “relatively cheap”, he believed they would outperform houses in the next year or so however, Australian Bureau of Statistics figures show most states are approving far fewer new apartments than the five-year average.

Mr Ryan said this was likely to clash with a pandemic-led shift in household formation, resulting in fewer people in larger homes — including apartments.

“And that might be a persistent thing,” he said.

NON-HOUSE RULES

Mortgage Choice director David Thurmond said buyers should be aware banks have special rules when it comes to apartment lending.

“Forty square metres is generally the minimum size for a home loan, though some banks will go to 35 or 32sq m, and some will include the balcony or car park in the figure,” Mr

Thurmond said.

“And banks are concerned about resale values of properties.”

PICKING A WINNER

Mr Ryan advised looking at a suburb’s rental market for a sense of its future for apartment growth.

“I’d be looking at things like rental yield and vacancy rates, which is probably the biggest indicator of excess home demand,” he said.

Australian Apartment Advocacy director Samantha Reece said finding a great apartment meant keeping a sense of non-financial benefits, like a superior location in walking distance of shops, beaches or other amenities.

Ms Reece said once you had a location in mind you then had to watch out for issues including a lack of cross ventilation for fresh air, a low proportion of live-in owners and no rules stopping units being rented as short-term stays.

To spot other concerns, she advised taking a building inspector with you to review the home and wider building. They’re more experienced eye might see signs of mould or “stalactites” that could indicate water is seeping through the concrete.

Ms Reece said if they missed an issue their liability insurance would help cover repairs.

It is also worth measuring the car park and your vehicle to make sure it will fit, particularly if your designated spot has a support column next to it.

Dogs in a building could be a good sign, as they often helped foster community and communication between residents.

Ms Reece advised looking for buildings where residents were tolerant, giving and do not mind background noise.

In all instances buyers should get a copy of the minutes from owners corporation or strata meetings for the past six months.

A well-structured owners corporation will have businesslike communications, a maintenance plan and provide regular cleaning for common areas.

“But if you see fees have jumped, ask why,” she said.

GOING OFF THE PLAN

Many apartment buyers opt for a unit that is still not built.

While this means you get a new home and more time to save for it, Mr Thurmond said it was important to note finance pre-approval would almost always expire before an off the-plan property was settled.

“If you have life changes, or

interest rates have gone up, there are a number of factors that could affect your borrowing capacity in 18 months time,” Mr Thurmond said.

While a long wait between buying and settlement could mean the value rose, it is also possible it could come down before you collect the keys.

If that happens, the bank will only lend to the value they ascribe to the home – not what you agreed to pay.

Ms Reece advised visiting past projects by the same developer and builder to assess their quality. If you have concerns, check the Australian Securities and Investments Commission to see if the same operator had started a new company after past projects.

She also suggested seeking advice from those who could read plans before purchasing in a yet-to-be-built apartment building.

This could help you avoid a water heater in your wardrobe or belatedly finding internal measurements were “architectural”, starting from the middle of the brick wall separating apartments, instead of the smaller strata sizings.

Ms Reece’s final advice was that owners corporation fees often rose a year after a building was completed, so buyers should ask the developer for second and third-year forecasts on fees.