Assignment Template for Individual Assignments

Subject Code: FNCE10001

Subject Name: Finance 1

Student ID Number: 697420

Student Name: Jonathan Li

Assignment Name or Number: Assignment 1

FNCE10001 Finance 1: Assignment 1

Jonathan Li, 697420
Tutorial: 1:15pm Tuesday, Wednesday, Thursday
Yolanda Wang
1) Although purchasing a home can be a great investment with huge returns, there are many
risks. Returns stem from both capital growth and rental income. Over the past year,
Melbournes property prices have risen by 8.9% (Sydney Morning Herald 2014). However,
Melbournes rapid property development has resulted in 17,000 new apartments in 2014
(Financial Review 2014), resulting in supply outpacing demand. Thus rental income and
capital growth is likely to slow down.
Assuming a moderate property growth rate of 6% per annum, the value of her property will
be $4,939,402 in 30 years: a capital gain of $4,079,402. From evaluations of property and
correlating rental prices of 3 bedroom apartments, adjusting for inflation, it is likely that she
will be able to generate on average $850 a week (Domain 2015) from renting out 2 bedrooms
over 30 years. This amounts to $1,326,000.
There are many risks associated with purchasing a home. With all her money in property, she
has little diversification and her home could lose value. However, this purchase is most likely
a long-term investment. Capital loss is generally a short-term problem. As seen in Figure 1,
due to numerous factors such as increased population and less living space in the CBD, even
though there are occasional dips in property price, over the long run, property prices tend to
increase.
Furthermore, she may be unable to find tenants after her friends move on after their degree.
Her monthly expenses become unpredictable due to unforeseen maintenance and repair work,
leading her to be unable to make mortgage repayments. Additional risks associated due to
mortgage loans are discussed later in this review.
2) Buying a property is a way of hedging against upcoming rental spikes and ensures she is
not priced out of the property market as property prices continue to soar. Already, first home

own buyers make up less than 10% of mortgages and applications for mortgages in Victoria
fell from 11.2% to 10.3% in January 2014 (your investment property, 2014).
Although a house purchase is an excellent investment as discussed, the apartment is too
pricey. Assuming she is a university student earning an average income of $18,634
(Australian Broadcasting Corporation 2013) she will only be able to borrow $45,691 over
thirty years (CommonwealthBank 2015). Even if she uses all her winnings as down payment,
assuming that she is even able to borrow $620,000 ($860,000 - $240,000) at a rate of 6.99%
compounding monthly, her monthly repayments will be $4,121 over 30 years. Although she
may be able to pay this in the future when she works full time, these repayments are unlikely
in the present by any stretch of the imagination.
It is thus a bad decision to make this purchase.
3) It will be very difficult to obtain financing, as she will be unable to borrow money.
Moreover, as the house price is exceeds $750,000, she is ineligible for a $10,000 First Home
Owner Grant (State Revenue Office 2014). The best way to finance this house would be to
use the lottery winnings and money borrowed privately, the easiest way being through her
parents. Assuming both parents earn $74,274, the average Australian full time wage before
tax (Australian Bureau of Statistics 2014), $629,140 can be borrowed over 12 years
(CommonwealthBank 2015). Her parents would then take equity in the house. She will be
able to pay back her parents at an agreed upon monthly rate, with payments increasing upon
full time employment. Upon full repayment, her parents equity would be transferred to her.
4) A major risk to this financing method is the risk of non-payment, resulting in foreclosure.
Her financial position as a student is volatile as she could very easily lose her part time job.
Additionally, her tenants, who are also students, may suddenly find themselves unable to pay
the high rent on this luxury property. Moreover, as interest rates are not fixed, they may
increase causing higher monthly repayments. All these unexpected scenarios can result in
repossession or bankruptcy if she is forced to sell the house and the proceeds of the sale are
unable to cover the mortgage.
A major cost associated is the interest on the loan. Assuming the standard variable
CommonwealthBank home loan of 5.9%, the interest paid by her parents would be around

$250,000. Moreover, there are many other fees and charges including upfront establishment
fee, monthly loan service and stamp duty.
Figures
Figure 1 (Victoria Residential Price Statistics)

Bibliography
Websites
1) Financial Review, 2014, Landlords hit by glut of apartments, Available from:
http://www.afr.com/p/business/property/landlords_hit_by_glut_of_apartments
_TyeuZS5jx2nrxr0Yo1MxaI . [15 January 2015]
2) Sydney Morning Herald, 2014, Sydney, Melbourne propping up slowing housing market,
Available from: http://www.smh.com.au/business/the-economy/s ydneymelbourne-propping-up-slowing-housing-market-20141103-11fw9w.html . [15
January 2015]
3) Domain, 2015, Properties found in Melbourne. Available from:
http://www.domain.com.au/search/rent/state/vic/area/innercity/region/melbourne-region/suburb/melbourne/?
bedrooms=3&bathrooms=2&searchterm=melbourne%2c+vic%2c+3000 . [16
January 2015]
4) your investment property, 2014, Investors Dominate The Mortgage Market As First
Home Buyers Are Priced Out, Available from:

http://www.yourinvestmentpropertymag.com.au/news/investors-dominate-themortgage-market--as-first-home-buyers-are-priced-out-185106.aspx . [17
January 2015]
5) Australian Broadcasting Corporation, 2013, Two-thirds of university students living below
the poverty line:
Report. Available from: http://www.abc.net.au/news/2013-07-15/majority-of-students-inpoverty2c-research-shows/4821230. [17 January 2015]
6) CommonwealthBank, 2014, How much can I borrow calculator. Available from:
https://www.commbank.com.au/personal/home-loans/how-much-can-i-borrow.html. [17
January 2015]
7) Australian Bureau of Statistics, 2014, Key Figures. Available from:
http://www.abs.gov.au/ausstats/abs@.nsf/mf/6302.0. [18 January 2015]
8) State Revenue Office, 2013, First Home Owners. Available from:
http://www.sro.vic.gov.au/sro/SROnav.nsf/alltitle/First%20Home%20Owners?open. [18
January 2015]
Figures
Victoria Residential Price Statistics, 2013. Available from:
http://www.macrobusiness.com.au/wpcontent/uploads/2013/07/ScreenHunter_25-Jul.-17-07.35-660x425.gif . [16
January 2015]