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Apartments outperform houses

John McGrath
Tuesday, August 24, 2010

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A new RP Data-Rismark report challenges an important established real estate trend. Whether the change will continue long-term is another question but this really is fascinating stuff.

Historically, Australian house prices have always appreciated faster than apartments due to a number of factors, most important of which is our traditional desire to own a house on a quarter-acre block.

However, things are changing and, over the past 10 to 15 years, apartments have become increasingly popular. Not only are they more affordable, more of them have sprung up in our most desirable locations such beachside suburbs where freestanding houses are pretty expensive.

And while home ownership is still the Great Australian Dream, lifestyle factors are far more important in the minds of today’s buyers than the type of property they get to own. Many of them don’t want to cease renting at the beach or near the CBD in order to buy an affordable house in the outer suburbs.

Two major social trends are also increasing demand for apartments over houses. Firstly, we have an aging population and a massive wave of downsizer buying has begun. The typical scenario is an empty-nester couple selling their family home in order to downsize to an apartment. Downsizing doesn’t necessarily mean downgrading either – a lot of empty-nesters are selling $2 million houses and buying $2 million apartments at the beach or on the harbour, thereby raising demand for large luxurious apartments.

Secondly, apartments are most definitely the home of choice for our young generation of executive couples who are increasingly living together before marriage, and often raising at least their first child in an apartment setting due to lifestyle and location preferences and affordability. 

Here are the stats.  Over the past five years, apartment prices have risen an average 7.4 per cent per annum compared to 7.1 per cent for houses. This is a new phenomenon because if we take a look over a 10-year period, houses are way ahead at 9.9 per cent compared to eight per cent for apartments. Put empty-nesters and young professional couples in the same box and it’s no wonder the Bureau of Statistics is predicting the most common household type within just three years will be couples living without children (either because they’ve moved out or they have none).

Let’s talk affordability. Nationwide, there is a marked difference in the median price of houses and apartments. Darwin tops the list at $142,176.

Then:
  • Sydney at $139,000
  • Canberra at $134,950
  • Brisbane at $90,000
  • Hobart at $84,250
  • Perth at $75,000
  • Melbourne at $70,000
  • Adelaide at $67,252

Over the past 12 months, apartment prices have grown faster than house prices in Darwin, Sydney, Brisbane and Perth. The cheapest capital in which to buy an apartment is beautiful little Hobart at a median price of $254,250. Sydney is the most expensive at a median $450,000.

So, apartments outstripping houses is certainly an interesting turn of events but I’m not sure this trend will be permanent, mainly because I suspect a slow down in the building sector over the past few years may be pushing up average capital gains on existing apartments.

One piece of land can hold 100 apartments compared to one house so there is far more scope to add to the supply of apartments. But developers have been held back recently by economic conditions and difficulty getting finance and that’s why new apartment supply is lower than usual. Once this is resolved, more apartments will come online while the supply of new houses will remain substantially lower.

So I’m not about to start recommending apartments over houses for long-term capital gains. But the good news is that no matter what type of property you buy – a house or apartment – you’re going to enjoy steady growth.

For investors, rental yields are also a consideration and it’s well-established that rental returns on apartments are higher because more of them are close to transport, cafes and shops. Right now the average yield for an apartment is 4.8 per cent annually compared to four per cent for houses.

Your best buy is a house with a backyard in a great lifestyle location close to beaches, cafes, shops and the CBD.  The problem is you’ll have to pay big bucks for it in major capitals like Sydney, Melbourne and Brisbane. So compromise where you can and if you choose to buy an apartment, do it with confidence.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Published: Tuesday, August 24, 2010


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