The change to a new working and home life prompted by COVID, combined with a general worry about the risk of oversupply during the last construction boom has seen investors increasingly lose confidence in investing in apartments and the house market has generally boomed throughout Australia, leaving apartments lagging behind.
So, a house MUST be a better investment, right?
Well actually, it is not quite that simple.
Historically, “houses and townhouses have outperformed apartments in terms of capital growth”.
But that answer is not actually correct either.
Here’s why.
Let’s firstly look at the difference in growth between houses and apartment in some inner and outer suburbs.
For the purposes of this example, I’ve simply taken two suburbs at random, Mount Druitt in Sydney’s outer west, and Mosman, a well know prestigious harbourside suburb in Sydney.
Well, according to data on asking prices from SQM Research, houses in Mount Druitt (Postcode 2770) increased by 9.4% pa over the past decade to April 2022 (at the time of writing this article) to reach an average price of $736,000.
Apartments increased by 5.6% pa to reach $411,000.
Based on my own 35 years’ experience that makes a lot of sense.
Houses have increased slightly more per year than apartments.
While a few percent doesn’t sound much, once compounded over a decade it can make a huge difference.
But apartments GENERALLY give a better rent return.
In the case of Mount Druitt, rental yields for house are 2.7% and for apartments are 4.3%, exactly what I would expect the difference to be.
Now let’s compare the desirable inner harbourside “blue-chip” Sydney suburb of Mosman (2088).
Over the past decade, to April 2022 house prices rose by an average of 3.9% to hit nearly $3 million.
Apartments rose by just under that. At 3.7% to reach $968,000.
BUT and this is critical, let’s examine what has happened over the past 12 months.
Mosman houses rose 11% Mosman apartments rose 30%!
Simply put because of the huge price difference between a house and an apartment.
And the current property boom widened what was already a sizeable difference in prices.
Of course, historically apartments have been cheaper, but the gap is now huge.
I could spend time taking different suburbs and get different results.
So let’s look at the major cities of Sydney, Melbourne and Brisbane to try to get an overall picture.
In terms of rental yield, Sydney houses show 2.3%, and apartments 3.6%. Exactly as expected.
Melbourne is similar: apartments 3.4%, houses 2.4%. And Brisbane also: apartments 4.9% and houses 3.4%.
So, the statement that apartments get a better rental return than house IS correct.
(Excluding taking into account repairs on houses vs body corporate fees etc on apartments)
And that a house get better capital growth than apartments?
Again, the major cities over the past 10 years to April 2022:
Sydney house 7.5% pa, and apartments 4.0% pa.
Melbourne is similar: houses 6.5% pa, apartments 3.4% pa.
And Brisbane also: houses 5.7% pa, apartment 2.2% pa
So, the statement that houses get better capital growth also seems correct.
But comparing apartments to houses is tricky!
If you HAVE THE FUNDS or the borrowing power to buy a house AND you don’t need a huge rental return, then that seems the best long term ’s the best way forward for a pure capital growth exercise.
But the huge increases in house prices, simply means that many investors and home buyers will be unable to afford a house in a prime location.
The fact is that there is huge money available for housing in our major cities.
And the wealthy don’t want to travel further and further out, so they will always be trying to buy in the leading suburbs.
SO, what does that mean for apartments?
Over the next 5-10 years, with the huge difference in prices between apartments and houses, with rising rents in apartments, and more and more people choosing to sacrifice a larger house in an outer area to be closer in, the rising number of singles and couples, and importantly the lack of new construction limiting future apartment supply, PLUS building prices rising, it is highly likely that new apartments will cost significantly more in the future, which will further put pressure on established apartment prices.
Above all, singles are a growing population segment, representing around 24% of all households in Australia (2016 Census) and increasing.
And couples WITHOUT children are now the most prevalent family group in Australia overtaking couples WITH children.
According to the 2016 Census, there were 6,070,000 families in Australia.
Most of these families represented couples without children (37.8%) and couples with dependent children (36.8%).
From 1976 to 2016 : The proportion of couple families without children increased.
The proportion of couple families with children decreased - a trend that applied to both those with dependent children and those with non-dependent children only.
Most of these families represented couples without children (37.8%) and couples with dependent children (36.8%).
Note: Other families include one-parent families with non-dependent children. Sources: ABS 1976-2016 Censuses Credit: Australian Institute of Family Studies 2020
Across all groups and segments of the population, the pace of household formations (the primary driver of housing demand) will continue to increase.
Demographic trends, including solid migration post-Covid, will converge to drive demand for rental property ever higher, but construction of new apartments is not keeping up.
High rise particularly has plummeted since the approvals peak 2015-2016.
In summary, the future looks rosy for an apartment investment in 2022, but careful selection is extremely important.
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And townhouses?
