The call came from the other side of the world. A two-bedroom apartment in one of Bondi Junction’s better buildings — 80 square metres internal, two bathrooms, one car space, currently tenanted. Bought off the plan in 2017 for $1.6 million, settled in 2021, worth around $1.8 million today. The question was the one I’m asked most often at the moment, and almost always in the same words: should I sell, or should I keep it?

Most people expect that conversation to be about the valuation — what it’s worth, what it might fetch, whether now is a good time. I understand the instinct, but a valuation is only a snapshot, and a hold-or-sell decision is a bet on the next ten years. The more useful question is not what the apartment is worth today. It’s what holding it actually earns, and who will want to buy it when she finally decides to sell — because both of those are under pressure, and neither shows up on a valuation.

The new-apartment trap

Start with the number that makes the apartment look cheap. A brand-new equivalent in the same pocket is asking somewhere near $40,000 per square metre — call it $3.2 million for the same footprint. Her apartment sits at roughly $22,500 per square metre. On paper that’s a 44 per cent discount to new, and it’s exactly the kind of figure that gets read as latent upside.

It isn’t. That gap is the ceiling, not the runway. New stock carries the depreciation benefits, the developer marketing and the “never been lived in” premium that buyers pay for precisely because it’s new. A five-year-old apartment doesn’t close that gap over time — it defines the value end of the same market, and it re-rates only if the whole market re-rates. So the real question is whether Bondi Junction apartments, as a category, are set to climb. Her own record is the first clue.

Has it even covered its cost?

The tempting way to read this is simple: bought at $1.6 million, worth $1.8 million, up $200,000. That number is a mirage, and showing her why was the heart of the conversation.

Begin with what the apartment actually cost to acquire. On top of the $1.6 million she paid roughly $73,500 in stamp duty in 2017 — so her real capital base was closer to $1.67 million before she owned a square metre. Measured against today’s $1.8 million, the genuine capital gain isn’t $200,000. It’s about $127,000 over nine years.

Then there’s the cost of money, the piece almost everyone leaves out. Whether she paid cash or borrowed, that $1.6 million had a price. Borrowed from a bank across the holding period, the interest bill comes to roughly $390,000 — cheap in the 2021 and 2022 years when variable rates sat near 2 to 3 per cent, then punishing once they climbed past 6 per cent and stayed there. Had she paid cash, that same $390,000 is simply what the money gave up by sitting in the apartment rather than earning elsewhere. Either way, it’s real, and it belongs in the sum.

Against that, she has collected rent — a little over $200,000 net of outgoings across the five years since settlement. A genuine offset, and I’ve credited every dollar of it.

Bought at $1.6 million, worth $1.8 million — and yet, once you count the duty, the interest and the rent, she’s behind. The $200,000 was never there.

Now put the three together. A capital gain of $127,000, plus roughly $200,000 of net rent, less $390,000 in cost of money, leaves her about $50,000 behind — before selling costs, and before a word about inflation. The graph tells it at a glance. Nine years in, the honest answer to “has it grown enough to cover what it cost me?” is no.

This isn’t a distressed asset or a bad building. It’s an ordinary, decent apartment that has done the thing well-located apartments have done for most of the past decade — held its price, paid a modest rent and gone nowhere in real terms. The reason that matters isn’t the past. It’s that the next ten years look harder than the last.

What the money would rather be doing

That’s the ledger on what holding has already cost. The arithmetic on the future is no kinder, and it’s simpler.

The apartment rents for $1,100 a week — $57,200 a year gross. Strata, council, water and insurance take roughly $12,000, so she nets about $45,200. Against a value of $1.8 million, that’s a net yield of 2.5 per cent.

Now the alternative. If she sold and cleared, say, 2.5 per cent in agent and legal costs, she’d net around $1,755,000. Left in a major bank’s online savings account at today’s rate — about 4.75 per cent — that cash earns roughly $83,000 a year. Fully liquid, with no tenant, no strata levy and no exposure to what’s about to arrive in Bondi Junction.

At today’s rates, the money simply sitting in the bank earns almost $40,000 a year more than the apartment nets in rent — before a dollar of capital growth.

That’s the crux. The bank pays her about $38,000 a year more than the apartment nets, before growth even enters the conversation. For the property to draw level on income it would need to appreciate by more than 2 per cent a year — more than its entire annual growth rate since 2017 — and that only ties the score. To justify holding, it has to beat the bank and be paid for the risk of holding an illiquid asset into a rising supply cycle. That’s a demanding hurdle, and I think it gets harder from here.

The supply nobody’s pricing in

This is my own read of the pipeline rather than a published forecast, so I’ll frame it as exactly that. On my count, Bondi Junction has in the order of 3,000 apartments planned or in train over the coming years. Several hundred units along the Oxford Street corridor look likely to reach the market within months. A large project is rising nearby with pricing pitched well above where the existing stock sits. And there’s a meaningful build-to-rent component — roughly a thousand dwellings — coming behind all of it.

Build-to-rent matters more than the headline number suggests, because it lands squarely on the rental side of the ledger. A wave of professionally managed, brand-new rental stock competes directly with a five-year-old private rental like hers, on amenity and on lease terms alike. That’s downward pressure on the very $1,100 a week that already struggles to beat a term deposit. Meanwhile the sale stock arriving at the same time caps capital growth from the other direction. Supply pressing on rents and on prices at once is not a backdrop I’d want to be holding a 2.5 per cent yield into.

Who actually buys it next

So set aside what it’s worth and ask who the buyer is. That’s where the argument closes.

It won’t be an investor — no investor runs the sum above, 2.5 per cent net against 4.75 per cent in the bank, and chooses the apartment. Nor will it be an offshore buyer; a foreign purchaser pays a 9 per cent surcharge on top of duty, which on $1.8 million is $162,000 before they’ve furnished the place. Two whole categories of demand, gone.

What’s left is an owner-occupier, realistically a dual-income couple who want to live there. Run their numbers. At $1.8 million they face around $84,800 in NSW transfer duty, and on a 20 per cent deposit they need roughly $449,000 in cash simply to reach the table. The $1.44 million loan, at about 6 per cent over 30 years, costs them close to $8,600 a month — over $103,000 a year. For a bank to approve that comfortably, they need a household income somewhere near $300,000 to $345,000.

That is a specific and narrow buyer: a high-earning couple with close to half a million in cash, choosing a five-year-old 80-square-metre apartment at the very moment several thousand new ones are being marketed around them, many with the depreciation benefits and developer sweeteners hers can’t match. They exist. There simply aren’t many of them — and the supply wave is about to give the few who do a great deal of choice.

Negative equity, and the exit that isn’t there

Everything above assumes a cash position like hers. Put a mortgage over the same apartment and a second risk appears — the one worth understanding before anyone buys into this market on 80 per cent finance.

Negative equity simply means the loan is larger than the property is worth. For the couple I sketched earlier — borrowing $1.44 million against $1.8 million, an 80 per cent starting loan-to-value ratio — it doesn’t take much. A fall of around 20 per cent or more, well within range if the supply wave lands the way I expect, and the debt begins to exceed the asset.

Here’s the part people get wrong. A standard home loan is not a margin loan. The bank won’t revalue the apartment mid-term, see that the LVR has blown out, and demand you top up the difference in cash — that “margin call” mechanism belongs to share lending and commercial facilities, not a 30-year residential mortgage. Keep making the repayments and negative equity, on its own, triggers nothing. The bank leaves you be.

The catch is what it quietly takes away. You can’t refinance — no lender writes a new loan above the value of the security — so you’re stranded on whatever rate you’re on. You can’t sell freely either, because Australian mortgages are full recourse: if the sale doesn’t clear the debt, you personally owe the shortfall, and the lender can pursue you for it. There is no posting back the keys and walking away, whatever American television has taught us. And for investors on interest-only terms — the group the Reserve Bank has flagged as most exposed to negative equity — the pinch arrives when the interest-only period ends and repayments step up, precisely when refinancing out is no longer possible.

Force only enters when the repayments stop. Miss enough of them and the path is well-worn: a default notice under the National Credit Code giving at least 30 days to remedy the arrears, then, if it isn’t remedied, court proceedings, possession and a mortgagee sale — after which any shortfall still follows the borrower. It’s arrears that trigger a forced sale, not a low valuation. But the two travel together, because negative equity strips out the escape routes a solvent owner would otherwise use to avoid ever reaching that point.

None of this touches my client directly, if she owns the apartment outright — hers is a paper loss against her cost, not a solvency risk. It touches her buyer, and that is the point. The prospect that a leveraged purchaser can’t refinance, can’t easily exit and can’t walk away is exactly what thins the market for a $1.8 million apartment heading into an oversupplied cycle. Selling now, into cash, doesn’t merely sidestep a soft market — it hands that entire set of risks to someone else.

What I told her

I didn’t tell her to sell, and I wouldn’t put it that bluntly in print — this is her decision and her circumstances, and none of the above is financial advice. What I told her was that she was asking the wrong question. The apartment’s value isn’t the issue. The issue is that holding it has quietly cost her more than it has returned, that its growth is weak in nominal terms and negative in real ones, and that the buyer pool she’ll eventually need is both small and about to be spoilt for alternatives.

If there’s a case for acting, it rests on timing. The owner-occupier bid still exists today, intact, before the new stock and the build-to-rent land. That window doesn’t stay open indefinitely. Whether she uses it is entirely up to her — but at least now she’s weighing the right thing.