One of the few benefits of age is that it provides some context about how the world is changing. This is also why we spend so much time looking at time series or longitudinal data when assessing virtually anything in property. One structural change that stands out is the rate at which apartments are being built compared to detached houses.
The Australian property market has traditionally been comprised of detached housing types. In fact, Australian cities are some of the largest in the world while having some of the lowest population densities. This means that developing transport systems is difficult and expensive due to the large distances that need to be covered and the relatively small populations to cover the costs. If we look at our city skyline and compare it to London, New York, Tokyo, and Hong Kong it still looks relatively small in comparison with few high rises. In saying that, those cities are a window into our future.
A quick look at the proportion of the population living in apartments in other parts of the world is telling.
- Hong Kong 76% of the population live in apartments (average size 58m²)
- New York City 91% live in apartments (average size 68m²)
- London 71% live in apartments or semis (average apartment size 43m², average house size 99m²)
- Sydney 45% live in apartments or townhouses (average size 121m²)
Markets have a way of creating order out of chaos and even shape the physical environment that we live in. Land invariably tends to move to its highest and best use over time. We can see this while driving in from the country to the city with farmland giving way to industrial property, industrial giving way to light industrial and gradually moving towards residential and finally retail and office spaces. Once we get close to the city where the highest productivity per capita is generated, the skyline is dominated by high rises because the price/m2 of land becomes so high that it is necessary to spread the value of land over multiple dwellings or offices.
In the 38 years where we have data, the proportion of attached dwellings (apartments and townhouses) approved for construction increased from 1:5 to 1:3. This is apparent when we compare the data. The number of approvals for houses has remained relatively flat, in contrast the trend line for detached dwellings has been increasing sharply.
If we drill down and look at the data for NSW the trend is even more obvious. In Sydney the city is constrained by the Pacific Ocean to the east, the Hawkesbury River to the north, the Great Dividing Range to the west and the Royal National Park and Port Hacking to the south. The only remaining greenfield corridors lie to the south-west and west.
As a result, we can see a clear long-term downtrend in the number of houses approved for construction compared and an uptrend in units. In fact, more than half of all building approvals in NSW are units now and the vast majority of these would be in Greater Sydney.
The monetary policy decisions of the RBA over the last 50 years have seen capital flooding into the real estate market. If we expect this trend to continue the only logical conclusion in the not-so-distant future is for the major capitals of Australia to begin to look like the big cities in the other major industrialised economies in the world.