The oldest, most rundown home on Australia’s busiest freeway is worth a lot more today than it was 20 and 30 years ago. Every piece of real estate grows over time.
But the specific rates of growth vary widely from city to city, from year to year and across different types of real estate assets.
In recent months there has been an increasing amount of commentary about apartments performing better than houses.
A review of CoreLogic data for the 2023/24 financial year confirms that apartments produced double-digit growth in 9 of Australia’s 20 largest cities. They were Perth WA (23 percent), Brisbane QLD (19), Adelaide SA, Toowoomba and Mackay (18 each), Gold Coast (15), Townsville, Cairns and Sunshine Coast (14 each).
At the other end of the spectrum, 9 other major cities saw a change in apartment values of between minus 1 and 5 percent. They were Sydney (5 percent), Newcastle (4), Central Coast (3), Melbourne, Hobart and Darwin (1 each), Bendigo and Geelong (zero) and Canberra (-1).
To satisfy curiosities, Australia’s best-performed property markets for detached houses in 2023/24 included Bunbury (31 percent), Mandurah (27), Rockhampton (25), Townsville, Busselton and Perth (24 each), Geraldton (22), Barossa (18), Gold Coast (17), Moreton Bay (16), Scenic Rim and Albany (15), Port Lincoln and Sunshine Coast (13), and Cairns (12).
Related article: Property market forecast (2024-26)
Is it time to pivot to apartment investments?
Given the elevated entry price and rising holding costs associated with investing in detached houses, it is reasonable to now question the merits of investing in apartments. Hence, Propertyology taking the time to publish this report.
Let’s begin by stating that the adage that “…land appreciates and buildings depreciation…” is relevant only to tax returns, not the capital growth equation.
Contrary to the mutterings of many, there is zero evidence to support that capital growth rates are directly linked to land size.
The frustrating new reality is that, despite there being more than 400 townships across Australia, gone are the days of buying a low maintenance, detached house in a central part of any major urban area with solid investment fundamentals for less than $600,000.
As Australia’s pioneer of borderless investing, if there were still sub $600,000 locations that stacked up Propertyology would be investing there.
To make an intelligent property investment decision in Australia in 2024/25, a purchase budget of between $650,000 and $750,000 is required.
With home loan rates at 6.5 percent and assuming a 90 percent LVR, investing in a standard house in one of those very few remaining locations will require the landlord to chip in between $1,000 and $1,500 per month (post-tax) to cover the shortfall between rental income and assorted expenses.
It is what it is. But delaying a decision to invest will merely diminish one’s future retirement lifestyle.
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There’s a greater number of locations across Australia where one can buy a 2-bedroom apartment for a more affordable price of (say) $550,000, have a $100,000 smaller mortgage and slightly better rental yields than a typical a $650,000 house.
But the $6,500 saving on the annual interest bill will be largely offset by body corporate fees. Which means that the annual cash flow is not significantly better.
From a property investment perspective, CASH FLOW is important, but the biggest contribution to one’s future financial independence will come from CAPITAL GROWTH [here’s how].
What the evidence says
The aforementioned locations where apartments have been the strongest over the last 12-months are being driven by property investors and their follow-the-herd mentality – they prioritise ‘cheap’ over ‘fundamentals’.
Let’s never forget that rising tides lift all ships.
Detached houses are akin to the tugboat, which is fundamentally designed to navigate all waters. Apartments are more like ‘the tinny’ – they serve an important purpose, but they cost less because are suitable for limited situations.
Decades of evidence confirms that, while there are the occasional years when apartments produce equal to or slightly better capital growth rates, detached houses perform significantly better over time.
Utterings suggesting that apartments will now be the better performed asset class simply because fewer people can afford detached houses is naïve, completely devoid of evidence and lacks understanding of cause-and-effect.
For literally every decade of the last 100+ years, Australians have constantly bemoaned ‘housing affordability’, each time claiming that ‘…it is worse now than before… the growth can’t be sustained’. Yet, over each 20-year period, house values increased by between 3 and 5-times [refer here].
Case Study: Sydney NSW
The blue and green columns in the below chart confirm that, as the cost of houses increased, the volume of apartments purchased in Australia’s most expensive capital city over the last 34-years has progressively caught up with the volume of detached houses.
But ‘affordability’ has not stopped the gap between house and apartment values consistently widening. One would be wise to never forget this compelling evidence.
Increased housing density
Whilst Sydney has built more apartments than houses each year since the late 1980’s, the rest of Australia has a relatively immature apartment market.
For the generations leading up to the turn of this century, less than a quarter of all residential dwellings in Australia were ‘attached dwellings’ (apartments, flats and townhouses). And the capital growth rate differential between houses and apartments was often very similar.
From the year 2000 onwards, urban planners significantly ramped up housing density initiatives. By 2010, more and more humans were squeezing into smaller spaces situated among major service centres, such as CBDs and large retail precincts.
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Over the 10-year period leading up to the 2020 global health pandemic, there was a significant reduction in the ratio of detached houses to total dwelling stock of Australia’s biggest cities.
As illustrated in this next chart, houses now account for only half of all of the homes in Sydney NSW, Darwin NT and Gold Coast QLD.
The next most densely populated jurisdictions are Tweed NSW (56 percent houses), Canberra ACT (57 percent), Melbourne VIC (59 percent), Cairns QLD and Byron NSW (61 percent each) and Busselton WA (62 percent).
Analysis of official evidence confirms that, while there will always be an occasional outlier year, as each individual city’s housing density increases, the capital growth rate differential between houses and apartments widens. Over the last decade, apartments in a majority of Australia’s most densely populated urban areas produced roughly half the rate of capital growth as a standard house.
It is extremely likely that this long-term trend will not change.
If anything, the work-from-home phenomenon will accelerate the trend.
The structural legacy left by the pandemic is a long-lasting emotional imprint and a strong thirst for a modified lifestyle which involves more space, less commuting, greater flexibility and, often, natural environments offered by regional communities.
Putting lipstick on a pig
Year after year, generation after generation, 80 percent of properties purchased in Australia are by secondary buyers, as opposed to first home buyers.
So, the impact of ‘housing affordability’ on overall market performance is never anywhere near as significant as the what the commentary of the day is flapping their gums about.
70 percent of Australian households are families. Assets which can accommodate this demographic will always be in the highest demand.
Growth is created by competition among buyers. Assets which meet a multitude of requirements of a bigger volume of buyers produce more growth.
A home which offers more living space, more storage, space for recreation, a home which a family can grow into, is modifiable, upgradeable, offers more privacy and which has more controllable costs will always attract more competition from future buyers than a cookie-cutter ‘box’ within a block of other cookie-cutter boxes.
‘Like putting lipstick on a pig’ is an ancient expression which refers to “…a futile effort to disguise the fundamental failings of something.”
While I acknowledge that apartments will always play a very important role within the broader Australian housing ecosystem, as an asset class apartments do have various fundamental failings.
Consequently, the gap between apartment and detached house values will forever widen.
3+ bedroom apartments
A miniscule portion of households choose to live in a luxury apartment with 3 or more bedrooms, 2 or more garages and various unique features.
Generally speaking, these properties do produce superior rates of capital growth than a conventional 2-bedroom apartment.
But 3+ bedroom and luxury apartments cost just as much as a detached house in various Australian cities. Yet they do not have a yard, can’t be extended, typically have very high body corporate fees and are big-time drain on cash flow.
1 and 2-bedroom apartments
A 1-bedroom apartment is not an option for a family. They have always been the worst-performing real estate assets.
The 2-bedroom apartment is akin to a Hyundai sedan for a P-plater. They are a dime-a-dozen asset with a limited lifespan. The mass-production and lack of distinguishable features significantly limits a vendor’s ability to push the envelope at the time of sale.
For a majority of 2-bedroom owner-occupiers, it is an affordability compromise to get into the market as a make-do-home. 5-10 years later, once equity and household income has sufficiently increased, they flick the ‘sardine can’ and trade up to a detached house.
Walk the walk
An innate thirst for living in detached digs is part of the DNA of this Great Southern Land.
Further evidence of the lengths which Australians will go to acquire a detached house is contained in the long-term internal migration pattern for Australia’s most expensive capital city, Sydney.
For every single year of the last quarter of a century, significantly more Sydneysiders said ‘ta-ta… too-do-loo’ and left town.
Year after year, the biggest beneficiaries are less congested cities with a much more affordable price for a detached house.
This chart contains some of the many examples in a few different states.
In a large majority of Australia’s 400+ townships, local governments continue to resist high-density living.
Detached housing still represents 70 to 80 percent of total dwelling stock in major jurisdictions such as Hobart, Geelong, Albury-Wodonga, Bowral, Bendigo, Maitland, Launceston, Wagga Wagga, Dubbo, Ballarat, Fraser Coast and Mount Barker.
The investment decision process
On a weighted level of importance to a property investor’s decision, city selection contributes as much as 70 percent to capital growth.
The specific parcel of bricks-and-mortar has a 20 percent weighted contribution.
This research report contains a great Case Study of a 14-year period].
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