Apartments out-perform houses

By Terry Ryder, 4th February 2012

One of real estate’s dominant paradigms – that detached out-performs attached – needs further overall.

The evidence of apartments challenging houses on price and rental growth has been accumulating in the past few years.

The theory underpinning the paradigm is that the greater land content in detached dwellings (standalone houses) generates better capital growth – because, as the old saying goes, land appreciates while the building depreciates.

Australian Property Monitors’ House Price Report records that the average situation across the eight capital cities was a 3.5 per cent decline in median prices in 2011. For apartments, the city average was a drop of just 1.6 per cent.

In the December Quarter six of the eight cities showed improvement in the median prices for apartments, including solid rises above 2 per cent in both Canberra and Perth. With houses only three cities advanced, with the best being a 1.1 per cent rise in Melbourne.

APM’s new Rental Report also shows apartments outshining houses in the capital cities. Median rental growth last year was higher for apartments than houses for every capital city except Canberra.

In Brisbane the median rent for units rose 5.8 per cent last year while the median house rent rose 2.7 per cent. In Perth unit rents rose 6.3 per cent against a rise of 5.3 per cent for houses.

In the December Quarter, the average across the eight capital cities was a 3 per cent rise in apartment rents but no change for houses.

“The trend of increased demand and associated higher rental increases for units compared to houses generally reflects the requirement of tenants to secure more affordable accommodation, as well as a growing lifestyle choice for smaller-sized inner-city dwellings close to urban infrastructure,” says APM’s senior economist Andrew Wilson.

Yields are higher for apartments than for houses in every capital city except Hobart. Wilson says: “Units continue to provide higher gross rental returns compared to houses, despite units generally out-performing houses in the sales market.”

The yield difference in Canberra is 5.4 per cent for units and 4.9 per cent for houses, while in Sydney the comparison is 5.1 per cent for units and 4.5 per cent for houses. This yield gap of about half a percentage point is common to most of the capital cities.

One other point revealed by the APM price figures warrants comment. When the floods struck Brisbane at the start of 2011, some of the more hysterical sections of the media suggested the city’s house prices would collapse by as much as 50 per cent.

At the time I wrote that this was not only way over the top but irresponsible. There has never been that kind of price collapse anywhere in Australia, including locations impacted by floods, cyclones, earthquakes and bushfires.

Last time Brisbane was devastated by floods, in 1974, there was a general 10 per cent decline in property values. I suggested at the start of last year that Brisbane prices would fall because of latest floods, but probably by less than the 1974 decline.

So it has proven to be. The APM data records a 7.5 per cent drop in Brisbane’s median house price in 2011 and a 5.8 per cent fall in the median unit price.

Those who added fear to the misery of flood-affected home-owners by telling them their property values would be decimated should feel considerable shame.

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