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Are apartments "safe as houses"?

In this edition of our newsletter, we ponder the origins of the old saying "safe as houses" and consider whether the saying is relevant to apartments as well.

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In order to get to the bottom of the issue, we have done some research on the capital growth of apartments, and the results might surprise you.

"Safe as Houses". It's what someone says when they are talking about something they believe is foolproof - as safe as the bank, perhaps even safer.

And there has always been a good reason for the saying. Real estate, especially residential real estate has been the measure, the mainstay of personal wealth for the average Australian since the beginning of settlement. If you owned property then that was your security. It is what has always made us feel most comfortable and relaxed about our future wellbeing.

Of course, today, many more Australians own shares or managed funds than was the case in the past, notwithstanding this, residential real estate is the asset preferred by most people. It is generally considered so safe that it is the only asset that lending institutions are so confident will maintain and grow in value that they will lend you 95% of its cost and in some cases they will lend you the equivalent of the entire value of the property. No Other asset comes anywhere near close to this where security is concerned.

But as the Title of this article questions, are apartments "safe as houses"?  This is certainly not a saying that many people readily attribute to apartments. In fact, many commentators and property pundits often go out of their way to insinuate that apartments are nowhere near as safe as an investment house on its own block of land.

Historically, as far as value is concerned, there are some very good reasons for this general differentiation between houses and apartments but as I'm going to show you later in this article, those arguments often don't apply today.

The great Australian dream

In the past, the dream of most Australians was to settle down in a nice house on a large block of land.  - often referred to as a quarter-acre block (1,000m). Block sizes today, are much smaller, often as small as 300-350m.

This great Australian dream was possible because city populations were small compared to the amount of land available for constructing houses. Land close to the centre if our cities was both plentiful and affordable and living in a house on a large block of land was appropriate because of the average number of people who were going to live in each home was much higher than it is today. In essence, the choice of larger homes was underpinned by the larger household formations of the day. Today, families which children still prefer a large house on it's own block of land, but this demand is reducing as the child-rearing days of the baby boomer generation come to an end.

So in a general sense, apartment living, and certainly in many of the apartments that were built in the past, really didn't meet the needs of most families of those times. Apartments were, for the most part, a stepping stone to a proper home on a large block of land. They were not a form of accommodation in Australia that more people would even consider living in for the long term unless they had little choice.

As a result of this, and with very few exceptions, most people who lived in an apartment would scrimp and save in order to get out of that apartment as soon as they possibly could.

And this attitude was further reinforced by the approach to apartment design that prevailed at the time. Sometimes small and cramped, and often in less desirable locations, many apartments in the past were poorly designed and possessed very little aesthetic appeal. They just did not look or feel good and were not designed for long-term residency. To some extent, these attitudes to apartment design and location still prevail to this day and are the reason apartments are not generally considered by many as long-term residences.

Examples of these types of apartments can be found in our larger cities and are often used by commentators as the yardstick or measure of apartments generally. The result was that apartments could hardly be called a good investment proposition and they were never really any good as a long-term residence the day they were designed.

Times have changed

That was the way things were. But Australia's population has been experiencing some fundamental changes in the last few years.

To begin with the nation's population has grown from 16.1 million in 1989 to more than 21 million people today. A great deal of this growth has occurred - and is still occurring - in our capital cities. The population of Brisbane, for example the capital of Queensland and the centre of the fastest growing region of Australia, is expected to double from 1.8 million to 3.6 million by 2041. And it will further increase to 4.2 million by 2051.

This trend of Australia's population to move towards its capital cities reflects a worldwide trend for people who live in larger cities. Australia as a result is becoming one of the most urbanised countries in the world. According to the Australian Bureau of Statistics, 64% of Australia's entire population currently live in our capital cities and with a projected population growth of about eight million people, that figure is expected to increase to 66% by 2051.

This larger urban population is, increasingly, fighting to find a home near our city centres where there is good public transport infrastructure, cultural, entertainment, shopping facilities and of course, lots of jobs.

Now that would not necessarily pose a problem except for one unfortunate fact - the supply of land in the centre of our cities is very limited and can't increase! You can wait as long as you like for the markets to ease up in these areas but the supply of land in and around the inner-city areas of Australia's capital cities will never grow. What's more, the desire of our governments to inhibit urban sprawl is increasing. This is because of the cost of getting appropriate infrastructure out to the fringes of our cities.

Without that infrastructure, commuting times are going to continue to increase making living in one of these urban-fringe suburbs even less desirable.

Successive government failure to address problems in the capital cities of Australia is not helping the situation. Transport infrastructure, particularly in Brisbane and Sydney is heavily stressed. This is creating congestion on our main arterial roads. Belatedly, an attempt is finally being made to address these issues, but it will be years before we will see any meaningful improvement. In one of our previous newsletters titled, Vertical Villages, I pointed to research that revealed people were comfortable with about one hour of travel per day at most. If they had to spend more than that time getting to and from their work, they tend to become very unhappy with their situation. It is therefore understandable that these factors are contributing to an inexorable trend to higher-density, inner-city living.

Modern families are smaller

For more than five years now I have been talking to you about how changing demographics are altering the face of the property market in Australia and as a result will add in something other than a house on a large block of land. And it seems that finally there is a growing awareness that these changes are taking place and are going to have an affect on how, where and in what style of property a larger percentage of Australian's population will live.

Regular commentary over the last few years in our media and by the usual property gluts, especially in our major cities, and in particular with respect to medium- and higher- density properties have, as we argued at the time, proven to be unfounded and have now given way to stories about the changes in household formation that are taking place and how to deal with substantial undersupply of property and the corresponding increases in rents that are accruing as a result.

Just to refresh your memory and to explain why some of these changes are taking place, in 1911, in Australia the average household formation was 4.5 people. By 2001, the number of people living in each household had fallen to only 2.6 people. Projections are that by 2026 their average household formation will have fallen to somewhere between 2.2 and 2.3 people.

This is reflected in the steady decline of the traditional nuclear family as a proportion of Australian households. The proportion of households that comprise couples with children is expected to fall from 34% to only 18% by 2026. By contrast, lone person  households and households of couples with no children are both expected to rise significantly.

Of course, most families with children will still want to love in a house with a back yard, but there will be fewer of them. In fact, given that couple families with children are expected by the Australian Bureau of Statistics to fall from about 2.5 million households to 2 million households between 2001 and 2026, demand for larger homes could be met from the existing housing stock. In contrast to this, there is going to be a significant and growing long-term demand for well positioned and designed medium- and higher-density property in Australia's capital cities to meet the demand from smaller households.

And - as I've pointed out time and again - the evidence already points to an undersupply of property in these areas. Rents are beginning to increase dramatically, and there is finally talk among both politicians and property pundits about how to address the critical shortage of accommodation in our cities - especially the inner cities.

Design and location is critical for medium - or higher-density property

In the past, many apartments were designed for people who couldn't afford a house, but with increasing populations in our capital cities and the changes to our household formations much more focus must be placed on the quality of those inner-city dwellings.

This means we need to design property that meets lifestyle aspirations and accommodation requirements of the modern city dweller. The smaller spaces of apartments need to be well designed with no wasted space - no long hallways, for example, which is part of the space you pay for, but obviously can not use. When a larger house is poorly designed, mistakes in their floor plans can be hidden. However, the same luxury cannot be afforded in apartment design where every square metre counts.

The good news is that it is possible to find well-designed medium- and higher-density properties. In fact, many of these modern apartments are every bit as well designed as a quality house you might find on a large block of land. The only difference is the floor plans are smaller and more efficient.

The trend to quality apartments has been led by wealthy purchasers who have decided they want to live closer to town and with all the benefits of a home without the maintenance and security issues presented by single lot homes. A penthouse apartment on the Gold Coast recently sold for the staggering sum of $18 million. Now, of course very few people can afford $18 million for a property, so the challenge is, of course, to provide well-designed apartments at prices average people can afford. This is not an easy task because of increasing construction and land costs and an exceptional rise over the last few years in local government charges to develop new property.

With much greater demand for these types of property, there is an increasing understanding of what is required. Which property?  has been recommending properties that meet the criteria for people who live in smaller household formations for many years. When you get those selection criteria right it doesn't matter whether you are an investor or an owner occupier the property will perform well. As a result, more and more people are choosing apartments as their permanent place of residence. They're buying them for the long-term, not simply renting them as a stepping stone to a house in the suburbs and even more people are buying properties as investments with the thought that they may move to live there when the time to downsize arrives.

And this is the great news for investors - because it means when you get it right, apartments are "as safe as houses".

DISCLAIMER: Whilst the publisher and author believe that the information contained in the publication is based on reliable and researched information, no warranty is given as to its accuracy and persons relying on this information do so at their own risk. Anyone who intends to use the information as the basis for making financial or business decisions should first obtain advice from a qualified professional person. This article is published on the understanding that neither the publisher nor the author - is responsible for the results of any action taken on the basis of the information published; and is not engaged in rendering legal, accounting, professional or other advice or services. The publisher and author expressly disclaim all liability and responsibility to any reader of this publication as a consequence of anything done, or not done, by a reader relying upon any part of this publication. (C) This article may not be reproduced in full or in part without the specific written consent of Which Property? and the Author.

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