Apartment or House – the old debate, with a slightly different ‘take.’


3/10/2012

Apartment or House – the old debate, with a slightly different ‘take.’

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 which 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.  Whilst this may oft 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, 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! Using 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 per cent, the ‘typical’ Aussie home still has three bedrooms and the stats show the majority are occupied by only 1 or 2 residents. In fact, only 14 per cent of loan 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 per cent to 24.3 per cent, whilst group households (shared accommodation) jumped from 3.9 per cent to 4.1 per cent. This is most likely due to reasons of affordability – renting a one bedroom inner suburban apartment can often be more costly than an older 3 or 4 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 who 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 their able to afford a suitable property for their 5-7 year needs.  Which ponders the question – 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 raises closer to 70% and in some states exceeds even this (ABS data.)

Therefore, whilst 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 due to overall size – less owners to battle with in the annual “owner’s corporation” meetings.

Furthermore, it seems when home buyers (first or otherwise) do purchase ‘new’ – 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, buyers will generally stick to low-rise apartment blocks – with the exception of the few looking for a luxury penthouse.  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 go and inspect the developments they’ve 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 upmost 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 RPData published some interesting information which further clarifies the above. Their 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 RPData may throw some light on the demise in sales.  They note 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, their 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 per cent and 42.8 per cent 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 which fall under the umbrella of a ‘unit’ sale, however it’s unlikely to be the case for apartment sales.

Whilst downsizing to a younger brain may be simply mean moving into a flat or apartment, elderly residents have a life time’s worth of furniture and memories to accommodate. Selling costs along with stamp duty and the stress involved in a house move, often deters 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 ‘town residence’ 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 their main objective.  This is all well and good, however if the investor is looking for capital growth over rental return they’re 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% respectfully, however St Kilda East, which has a higher percentage of low rise established apartment blocks, currently has a vacancy rate of 2.5 per cent (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.

Catherine Cashmore

 

 

 

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Catherine Cashmore has been working in the Australian real estate market for over 14 years. As a buyer advocate, she has assisted hundreds of Australian home buyers and investors to secure quality real estate for the best possible price. Originally from the UK, and having lived in the US, Catherine is a seasoned traveller who has extensive experience across a range of international real estate markets for those interested in property investment overseas.. 

As President of Australia's oldest economics organisation, Prosper Australia, Catherine is a regular and highly respected media commentator and often called upon to give guest lectures to university students (including RMIT and Sydney University) on how tax policy affects real estate, the design of cities and the economy.

She is editor of Port Philip Publishing’s 'Cycles, Trends, & Forecasts' – a publication that teaches real estate investors about the land cycle and its effects on the economy. She is author of ‘Speculative Vacancies’, the only study in the world that analyses long term vacant housing based on water usage data (Melbourne focused). As such Catherine has an in depth knowledge of the Australian real estate market, few can rival.

You can contact Catherine directly on 0458 143 089 or at cc@cashmoreco.com.au

 

 

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