Should you invest in an apartment or a house?
Readers talk back
I often get asked the question from investors "which is better – an apartment or house?". Of course, it broadly depends on what the investor hopes to achieve from their purchase and depending on their preferred location, the answer is often dictated by budget alone.
Broadly speaking, as a "set and forget" option that promises appreciation over time, it's hard to beat an apartment close to inner-city amenities. Providing you're careful with the pre-purchase due diligence in terms of property style and position, apartments generally attract a higher yield, are low maintenance, and when issues with the building do occur, they are generally handled by the owners' corporation and/or property manager.
However, regularly you'll read property commentators dictating that apartments perform better in their median data than house prices. While this may often be the case over the short term, it has not been proven over the long term. In fact, over a long time frame, median detached house prices have outperformed unit prices, and there are sound fundamental reasons why this may continue.
Apartments have their benefits. The price of land in inner suburban capital city zones has become so expensive that for a good proportion of buyers restricted in location their budget is hamstrung to this type of property. However, for the larger demographic, apartments are considered the place where you start out – not end up.
We get bombarded with this idea that everyone is "downsizing" – and once again it's another excuse by property commentators specialising in apartment sales to promote this option over others. Everyone's living alone, they cry! They use previous census data to prove the single-person household is the fastest -growing demographic in the nation.
However, I'd hazard a guess that a good proportion of these single dwellers are comfortably living in houses or town residences, rather than pottering about in a one-, or even two-bedroom apartment – and recent census data proves exactly this.
At 44%, the typical Aussie home still has three bedrooms, and the stats show the majority are occupied by only one or two residents. In fact, only 14% of lone-person households live in one-bedroom dwellings, and there's been a big increase in the number of four-bedroom homes, which now make up almost a third of the housing stock.
Not only this but, as the latest census results further prove, the single-person household is no longer the fastest-rising demographic. In the 2011 results, lone-person households dropped from 24.4% to 24.3%, while group households (shared accommodation) jumped from 3.9% to 4.1%. This is most likely due to reasons of affordability – renting a one-bedroom inner-suburban apartment can often be more costly than an older three- or four-bedroom detached dwelling a few suburbs out. It makes sense therefore to share, and this trend is mirrored in other international markets – such as the UK and Canada, which produce similar data in their own census breakdowns.
Most of the first-home buyers who cross my path also follow the above pattern. Rarely do they opt for a one-bedroom apartment – unless they're restricted to a particular suburb. Most opt to move outwards and purchase something larger and if given the option, would rather rent until they're able to afford a suitable property for their five- to seven-year needs. So who's buying all the apartments?
What we do know is Australia-wide, 58% of apartments are owned by investors. Break this data down to a state-by-state capital city level and the investor-owned percentage of inner-city apartments is closer to 70% and in some states exceeds even this (ABS data.)
Therefore, while there are a proportion of home owners selecting an apartment lifestyle, for many it's still not the desirable option. Furthermore, data proves the first-home buyer demographic broadly prefer established over new, therefore it's highly likely they will opt for older-style apartments in smaller blocks, all of which generally offer larger floor plans and fewer owners to battle with in the annual owners' corporation meetings.
Furthermore, it seems when home buyers (first or otherwise) do purchase new, they will generally stick to low-rise apartment blocks. This is due to stricter lending restrictions for high-rise accommodation, coupled with high owners' corporation fees and the not-so-desirable aspects this type of accommodation offers. This is evidenced in the latest NAB quarterly Australian residential property survey.
The report notes that when it comes to inner-city new dwellings, demand across all states is strongest for "low-rise apartments and townhouses", with "middle-ring housing" being the next best option. In fact, when broken down, demand for townhouses far outweighs demand for apartments. Yet, despite this, across all inner-city regions, we've seen a boom in high-density accommodation – most of which has been in the form of relatively compact one- and two-bedroom high-rise dwellings.
It would seemingly make sense to build as much accommodation on a piece of land as possible, however I often wonder if once constructed, the council ever goes and inspects the developments it has approved?
I've had the "good fortune" to walk through many of the high-rise – and for that matter, low-rise – unit blocks. The artist drawings depicted in the pre-sale advertisements rarely represent the reality – which is always somewhat of a disappointment. Therefore, it pays for buyers to enlist the utmost caution when assessing apartments of this type prior to purchase (which of course cannot be done when purchasing off the plan). It's also my experience that many home buyers consider the accommodation on offer in the newer units, poor value when confronted with the initial asking price.
Last week RP Data published some interesting information that further clarifies the above. The latest research shows the largest number of sales nationally is for detached dwellings as opposed to units or apartments. Considering Australia's biggest buyer demographic is made up of family home buyers with and without children, this isn't surprising, however the data also shows a decline in the number of unit sales, which is interesting when it's generally assumed home buyers at all stages would be flocking to the unit sector for affordability reasons. After all, as one managing director of Colliers International recently stated:
"Australia is catching up with the rest of the world, with apartment living becoming more acceptable to families."
I'd suggest there is a lack of significant evidence to back this statement up.
Further research from RP Data may throw some light on the demise in sales. It notes that the greatest number of unit sales is predictably in capital cities, where there is a large disparity between house and unit prices. For example, its analysis shows Canberra and Sydney have a gap of $110,000 between house and unit sales. However, Melbourne only has a gap of $48,000 between the property types.
Consequently, the unit sales percentage in comparison to detached dwellings in both Canberra and Sydney is 42.5% and 42.8% respectively. Obviously, the greater the difference in price, the larger the perceived value for buyers and investors who would therefore be encouraged to buy.
The report offers the following statement:
"Demographic factors are also likely to contribute to greater demand for units, with baby boomers looking to downsize from their large family homes into something smaller and more easily maintainable."
This is may be true for some property types that fall under the umbrella of a unit sale, however it's unlikely to be the case for apartment sales.
While downsizing to a younger brain may be simply mean moving into a flat or apartment, elderly residents have a lifetime's worth of furniture and memories to accommodate. Selling costs – along with stamp duty and the stress involved in a house move – often deter consideration of the above altogether. However, when it does occur, the preference would certainly be downsizing the land component of the property rather than the level of accommodation. In other words, the good old single- or double-level townhouse or terrace.
It's clear therefore the predominant market for inner-city unit sales (particularity high rise) is firmly in the court of the investor who is one step removed emotionally, and need not have personal lifestyle requirements as her main objective. This is all well and good, however if the investor is looking for capital growth over rental return she's going to do a lot better focusing on property that attracts Australia's larger buyer demographic – the owner-occupier market. Hence why established or older-style period apartments in smaller blocks deliver higher long-term returns.
For investors who like the idea of purchasing new in order to take advantage of increased yields, various spruiked rental guarantees and tax depreciation benefits – they could find securing long-term tenants problematic. Vacancy rates in high-rise accommodation far exceed their established counterparts. For example, Melbourne's Docklands and Southbank, which have the largest number of high-rise apartments, have vacancy rates of 10.4% and 9.2% respectively, however St Kilda East, which has a higher percentage of low-rise established apartment blocks, currently has a vacancy rate of 2.5%, according to SQM.
Considering the above, I would suggest it's far more sensible when re-zoning inner-city land, to cater to a home buyer market and provide a greater proportion of accommodation to attract home buyers – principally low-rise developments and terrace housing – rather than building an endless supply of tower blocks. However, considering the pace of high-rise construction it's a piece of advice I can all but guarantee developers and town planners won't adhere to. Perhaps the property investors out there can take note instead.This story first appeared on Property Observer