The rise of the three-bedroom apartment

Posted by Gavin Chau

This blog was the result of a conversation between Tony and I about the direction of the property market moving forward. While we have some small differences of opinion on the reasoning the end conclusion is largely the same.

Affordability has become the word of this cycle due to the combination of higher interest rates and higher property prices. We have seen buyers getting priced out of the most expensive properties. Over 2024 there has been more buying pressure in apartments than houses and regionals have also outperformed capitals as investors have been priced out of more expensive options and increasingly compete for the cheaper options they can afford. Of course, this has driven up the prices in the bottom 25% of properties.

The same pattern has been seen throughout every state and territory and although 77% of Australians still prefer houses, units are now a more realistic option for many ordinary Australians looking to get into the housing market.

We can see this clearly in the data with the proportion of homes that are affordable for the top 25% of household incomes ($172,000) falling from 80% in 2020 down to 50% in 2024. For the median income household ($101,000) the proportion of affordable houses fell from 50% to 10%. The bottom 25% ($50,500) moved from 10% to 0. The segment of society most in need of support effectively got locked out of the housing market and the median income households don’t look much better.

One interesting thing to note is that in the largest capitals (Sydney and Melbourne) three-bedroom units have become a realistic substitute for houses as rising land prices have made houses close to the CBD prohibitively expensive. Buyers who have been priced out of house and land options close to where they work are increasingly moving into three-bedroom apartments as an alternative. The large internal spaces of around 120-150m² are around 85% of the size of a three-bedroom house which averages 150-175m². While the internal space is comparable the price is often 50% of what a house would cost, making them an attractive alternative.

The increased interest in these options has driven up the prices as the capital that otherwise would have flowed into the market for house and land options spills over into the apartment market. The relative outperformance of three-bedroom units over one- and two-bedrooms units in Sydney and Melbourne over the past five years supports this.

One useful analog market to compare is the housing market in Hong Kong which has the most unaffordable dwelling prices in the world by a large margin (Sydney is #2 and Melbourne #7). The cityscape in Hong Kong is dominated by apartments which comprises 93% of all dwelling types as it is more cost effective to spread the cost of a single parcel of land over multiple dwellings rather than build a single house on it. The average rate of home ownership has been on a steady decline, as has the average dwelling size which has fallen to 45m². Most of the housing is increasingly concentrated in the hands of the wealthy.

These trends are directionally the same in the bigger urban centres in Australia. While our average dwelling sizes have remained relatively stable, we have falling land sizes for houses. In the past the ‘great Australian dream’ was the quarter acre block (1011m²), then the average suburban house fell to 600-700m², and now the average block size on a new housing estate is around 300m². Similarly, we have falling rates of home ownership in every age cohort and an increasing number Australians retiring with mortgage debt.

Interestingly, the trend towards three-bedroom apartments has only been observed in the more mature housing markets of Sydney and Melbourne and is yet to be seen in the other capital cities. Anecdotally the same pattern is being observed in both the Gold Coast and the Sunshine Coast although that seems to be driven by retirees downsizing and selling a more expensive house for lifestyle reasons, to get rid of the mortgage, or pass on an early inheritance to their children. While it is not widespread enough to show in the data it could well be an increasing trend moving forward and it is one of the things we are always keeping an eye on.