Houses or Apartments?

Posted by Daniel Joseph

Houses or Apartments? It’s like having to pick a favourite child. Lucky for me, both kids are over-achievers. The affinity of some toward housing is understandable: most Australians grew up in a house, creating a natural sense of familiarity and comfort. My investment decisions, however, are based on facts, not tradition or comfort – but that’s just me.

I’d argue that the most common weapon in the armament of those on the side of houses is the fact that land appreciates while buildings depreciate. This basic argument neglects to recognise that value is governed by demand, and demand for accommodation is changing. The adage that it’s the land component of property that has value, meaning you should buy a house, no longer applies. To a large degree, younger and older Australians are forgoing the quarter acre block (did I say quarter acre? The average new plot size is less than 400 square metres) in suburbia for inner city high-amenity living, and that’s often apartment living.

Time for a graph. The figure below tracks the percentage increase in the capital city housing and apartment indexes between 2003 and 2016. The index basically combines the performance of our capital city property markets, weighted according to the number of sales in each market.

Combined Capital City Price Growth: Houses and Apartments – 2003 – 2016

Source: Blue Wealth Property and ABS 6416.0

Overall, the movement of both series is largely consistent, with the most significant difference being that the peaks and troughs of the apartment growth cycle are less extreme than those of the housing cycle. Over the sample period, housing growth has slightly outpaced apartment growth, with the former increasing by 104% and the latter by 82%.

I bet you’re thinking: ‘I’d rather buy a house and make the additional 22%.’ Here’s a couple of reasons why this point of view fails to consider the investment big picture:

Rental yields for apartments are 33% higher than those for houses (4% vs 3%). On a $500,000 property, that’s an extra $97 per week rent for the apartment investment. That additional 1% per year adds up to a 13% advantage for apartments between 2003 and 2013. That 22% difference is down 9%.
Depreciation benefits are higher on an apartment than they are for a house because the building makes up a larger proportion of value for an apartment.
Maintenance costs on apartments are lower than they are for houses, negating the effect of body corporate fees.

All things considered, the argument isn’t one of houses vs apartments. Rather, it’s a question of whether demand in an area is geared more toward larger or smaller dwellings.

Posted by Daniel Joseph, on 19th Jun 2017