Units continue to challenge house dominance

Posted on 17/04/2013  

The latest Rental Report from Australian Property Monitors highlights how much apartments are challenging standalone houses for the hearts and minds of property consumers.

One of real estate’s dominant paradigms has been that houses out-value apartments because of the greater land content. The land appreciates and the dwelling depreciates, so they say.

But as more and more buyers and renters opt for apartments, the old dynamic is shifting.

In Melbourne, the median rent for apartments is the same as that for houses, at $360 per week. In Sydney, there is a narrowing gap: the median house rent is $500 and the median unit rent is $470. There’s also a small difference in Brisbane: $390 for houses and $375 for units.

The popularity of apartments as a lifestyle choice has been rising readily for years. This is seen in the figures for new dwelling construction across Australia: the market share of units and townhouses has risen sharply in the past five years.

In 2008-09, 30% of new dwellings were units. It rose to 33% in 2009-10 and further to 38% in 2011-12. In the current financial year it will be close to 40% of new dwellings constructed.

Part of this may be attributed to over-building in places like the Gold Coast and inner Melbourne, but it does tend to confirm the steady rise of attached dwellings as a force in the market.

This has gathered pace through the preferences of younger buyers, opting to buy or rent closer to the inner-city action, rather than secure a house on land further out, and preferring also the low-maintenance lifestyle offered by units and townhouses.

Affordability is another part of the choice. While the rental gap between houses and units has narrowed, there is still a considerable difference in price for those opting to buy.

The RP Data-Rismark Home Value Indexes indicate that the typical Sydney house costs $620,000 but the standard unit is $488,000. So while houses cost only 6% more than units to rent, they cost 27% more to buy.

In Melbourne the average house costs 20% more than the typical unit, but there no difference in the rent. In Brisbane, houses cost 33% more than units but the rental differential is only 4%.

That’s an equation that should make investors sit up straight and pay attention. Units are much cheaper and the rental returns, on average, are much better.

It’s clear from the planning decisions coming out of state governments around Australia that our political leaders want more of their population growth to be absorbed through infill development, in preference to growing the city footprint through house-and-land urban sprawl.

We’re seeing councils in our major cities allowing greater densities to be developed in suburbs currently dominated by standalone houses.

There’s no doubt that the near future holds a vision of more residents living in units and townhouses, preferably close to public transport nodes.

And, increasingly, this will change the parameters for investing in our major cities.

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