RP Data reported recently that Brisbane apartments in 2011 lost value of 6.5% (when looking a medium sales prices of apartments that actually sold in 2011).
Let's assume Mr Investor purchased a Brisbane apartment on 31 December 2010 as an investment for $485,000. Assume that he borrowed 80% of the purchase price, including stamp duty. Stamp duty is $14,850. So the total purchase cost, including legal fees and bank fees, is just over $500,000. Mr Investor put in $100,000 of his own money, and borrowed $400,000.
That apartment, if it went down 6.5% in value, is now worth $453,475. That is a capital loss of $46,525.
So Mr Investor has had a capital loss of over 46% in one year. That is the risk of leveraging. A small decrease in value means a large capital loss where there is a leverage situation. (If Mr Investor had to sell, he would pay over $10,000 in real estate agent fees, making his capital loss even greater.) If values decrease further, Mr Investor will be completely underwater. I suspect that there are many apartment owners in Brisbane who have little or no equity left.