House vs Apartment

How many times have you heard the line that the value of a property is held in its percentage of land ownership? This statement infers that stand-alone homes will always experience stronger capital growth than apartments. This is a baffling remark, highly subjective to individual circumstances and often misleading. Yet it keeps popping up! Real estate trends are constantly evolving and that means many of us need to rethink how we perceive property. In this issue of Property Insight, we unpack this long-held belief and see how it stacks up in today’s marketplace.

Where it all began…

The belief that land holds a property’s value lies in the basic premise that land appreciates, while buildings depreciate. With that reasoning, a stand-alone home has the potential for more growth as it holds 100 per cent of land ownership. An apartment only owns a percentage of the land on which it sits. As a generalisation, this seems to make sense. But when you factor in budget, location and desirability, the idea that a stand-alone home is always a better investment doesn’t hold.

The population squeeze

In the past, when inner-city land was more available, it may have been fair to say that the percentage of land ownership was the most important consideration when investing in property. These days, Australia is experiencing rapid growth – from 16.1 million in 1989 to more than 22 million last year – and that affects the way we live.

Most growth is happening in our capital cities. Today, almost two-thirds of the Australian population, or 15 million people, live in our major cities, – and this trend is expected to continue. The population in Brisbane, for example, is expected to more than double by 2056.

Across Australia, the growing urban masses are increasingly fighting for property near city centres. Here people can enjoy cultural and entertainment precincts, shopping, facilities and plenty of opportunities for work, all backed up by solid infrastructure such as public transport. With limited land available, the only option is to build up, meaning medium- and high-density living is rapidly becoming the norm.

Shortages of this highly desirable property are already apparent. The property market is quite literally much tighter the closer you get to any of Australia’s CBDs.

To continue with Brisbane as an example, property commentator Michael Matusik estimates that Queensland as a whole has a property undersupply to the tune of 20 per cent, whilst the inner-city apartment market is currently as much as 40 per cent undersupplied.

It comes back to supply & demand

Due to the population squeeze and the desirability of central living, the land that inner-city apartments occupy has become increasingly valuable. In many cases, this makes up for the smaller percentage of land ownership. With this in mind, we propose that a property’s potential for capital growth lies in demand, not the land. In other words, lifestyle is a key influencing factor worth its weight in gold.

The budget factor

Another influence shaping the property market is affordability. Most stand-alone homes close to the CBD are now priced at well over $1 million, making these properties unreachable for many of us. Meanwhile, buyers can achieve the same lifestyle in the same desirable location for much less by purchasing an apartment or townhome. Depending on the location, an inner-city apartment or townhome may be up to half the cost of a stand-alone home.

Lower entry-level pricing for medium- to high-density properties in inner-city locations drives this market’s appeal and makes it more accessible to a wider demographic. This assists with resale too, an important consideration for every property purchase.

With this in mind, saving for a deposit for an apartment is generally much more achievable, leading to property ownership in the same location sooner. In a rising market, this may be a consideration in the decision making process.

Demographic shifts

With the potential to change the dynamics of the property market, Generation Y is showing a strong preference for inner-city living. In most cases this can only be achieved with more affordable housing such as apartments and townhomes. Location, lifestyle and affordability are the major considerations for this demographic, which makes up 26 per cent of the adult population.

According to Urbis Research, “Gen Y will be defined by a growing income-earning potential, combined with a growing household size, yet the majority believe that inner-city family living is beginning to be the norm. The focus will be on dwellings in environments where they can live, work and recreate; higher density will not be opposed.”

So it seems the great Australian dream of owning that acre of land is diminishing. In many European countries, such as Germany, it is quite typical to live in an apartment for your whole life. In Australia, smarter developers understand that Gen Ys are now starting their families. As a result, an emphasis on parks and useable recreational areas is becoming more common in inner-city master-planned communities to cater for the families that will be living there in the future.

All you really need to know

As we’ve discussed, shifts in the market have seen a greater focus on location and lifestyle. The term ‘urban village’ seems to be popping up everywhere and developers are embracing the philosophies behind this movement.

From a capital appreciation perspective, it is important to understand that houses do not necessarily experience stronger capital growth than apartments. In fact, apartments outperformed houses Australia-wide over the past five years to December 2013, according to the Real Estate Institute of Australia. What’s more, apartments increased in value by 19.8 per cent compared to houses rising in value by 16 per cent.

Balancing financial goals & lifestyle

When investing in property, it’s wise to step back and take a holistic approach; that means taking into consideration capital growth potential, rental returns and your ultimate financial goals and lifestyle. A key consideration should be the type of investor you are. A time-poor investor would be more suited to a low-maintenance apartment or townhome, for example.

Also, when it comes to the apartment versus stand-alone home debate, bear in mind that rental returns for apartments have also outperformed houses over the past 10 years. RP Data-Rismark reveals that apartment yields across the combined capital cities are currently sitting around 4.9 per cent compared with houses at 4.2 per cent. Of course, investors need to choose carefully, as location and demographics will dictate rental demand and return.

A brave new world

When choosing a property, it is essential to weigh up all the considerations rather than rely on generalisations. The adage that the value of a property is held in its percentage of land ownership is simply outdated and outrated. While inner-city apartments may not hold such a large portion of land ownership, the location’s desirability will drive demand and therefore prices in today’s market.

At Which Property we specialise in tailored property solutions for investors and owner-occupiers alike. We can help you understand your goals and find property solutions suited to you. Contact us today for more information.

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