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October 14, 2011

Why apartments will outperform houses

Backyards, barbeques and big houses have been the norm for Australian homeowners over many generations. But what of future generations?


Some demographers suggest we’re so much in love with the idea of having big spaces to raise a family that it’s impossible for us to change, despite the fact that Australia will likely have to absorb 2.3 million additional households over the next 15 years alone and we’re not sure where we’re going to put all these people.

Sure the Baby Boomers and many of their Gen X offspring have found it hard to sacrifice sprawling McMansions in favour of smaller accommodation, but will Gen Y be more inclined to embrace higher density living?

A recent report from the Grattan Institute indicates a growing preference toward apartment-style accommodation in Australia.

The study, aptly entitled The Housing We’d Choose, found Australians want more apartment-style housing and are moving away from detached housing.

It also found we’re not building enough of the type of accommodation more and more people want.

Not enough apartments to go around

In 1976, detached dwellings (houses) made up 78 per cent of all accommodation, however by 2006 this had dropped marginally to 74 per cent.

While four per cent doesn’t sound like a large reduction, it’s interesting to note that many respondents indicated a preference for apartment living, with the issue being a lack of higher density stock compared to the vast number of detached homes on the market.

The report suggests there are potentially thousands of tenants and homebuyers out there who simply can’t find the type of accommodation they’re seeking in the places they most want to live.

Author of the report Jane-Frances Kelly says there’s an ever-increasing divide between the style of housing people want and what’s available and that the construction industry needs to be more aware of our changing needs and place greater emphasis on affordable, higher density options.

No longer the slums

Over the years our perception of townhouse and apartment living has changed.

Where once we saw medium and high-density developments as ‘slums’ intended for lower socio-economic classes, in the last twenty years or so apartment living has become the practical and trendy alternative, in particular sought after by young, upwardly mobile professionals.

“In short, many of the detached houses…are a legacy of a time when Sydney and Melbourne were different cities. Today’s stock reflects attitudes formed and decisions made under different conditions, some of which no longer apply,” says Kelly.

So why aren’t we building more apartments?

Well we are… in some locations.

The growth in apartment popularity has certainly influenced the Melbourne skyline of late, with a saturation of new stock hitting the market and more set to come online in the next year or two.

In fact I’m concerned there’ll be an oversupply of apartments in the Melbourne CBD and that this will create a severe price correction in that market, especially as many have been bought by investors, some who won’t be able to settle their purchase and others who won’t be able to find tenants at a time when we have fewer overseas students coming to Australia.

An oversupply of CBD and new-near city apartments is also looming in Brisbane.

But in general the high cost of land, local council restrictions, the resistance of local communities, high development costs and difficulty obtaining funding is stifling new apartment development in many of our inner and middle ring suburbs.

Then of course there are the infrastructure constraints to consider – namely pubic transport access and the capacity for existing roads and public facilities, such as schools and hospitals, to handle the type of rapid growth in resident numbers that higher density housing would create.

Some lessons for investors

Let’s face it… as our population grows there’s no doubt we’ll need to embrace the apartment culture.

This shouldn’t be a real problem as fortunately our lifestyle preferences are changing, with many Gen Y’s prepared to trade a backyard for a balcony.

It’s no coincidence that over the last few years investors who owned well-located apartments have done well as capital growth and rental growth has often outpaced growth in detached housing.

But as always, you can’t just buy any apartment and hope it makes a good investment.
I’d steer clear of generic, off-the-plan and in particular, CBD stock. Inherently these lack scarcity and will be more risky in the next few years due to the glut of similar developments coming on line.

Here’s my recommendation: you’d do much better buying an established apartment in a highly sought after, near city or bayside location where you’ll find smaller, boutique-style apartments that are always in favour with buyers and tenants.

Sure they might need a bit of a facelift, but this is just a chance to add value to what already represents an asset with excellent potential for strong long-term growth.

Michael Yardney is the director of Metropole Property Investment Strategists who create wealth for their clients through independent, unbiased property advice and advocacy. He is a best-selling author, one of Australia’s leading experts in wealth creation through property and writes the Property Investment Update blog


  1. Yeah, lots of people now accept the “apartment culture” as you said it. I guess that’s because most apartment buildings are near their workplace and that is a great advantage, not to mention that there are property managers who may handle some of the building’s needs, so their hands are getting freed from problems arising when you own a house. But personally, I still prefer houses for its space.

    Comment by Joel MacDonald — October 20, 2011 @ 7:41 am

  2. Thanks for the comment Joel

    Yes – there will always be families who need the extra space and houses will suit them better.but as our cities mature these will become more expensive in the inner and middle ring suburbs, encouraging some families to move further out.

    Other one and two people households will be happy to trade their backyards for balconies

    Comment by Michael Yardney — October 20, 2011 @ 8:04 am

  3. Good article Michael. I especially agree with your recommendation of buying older units as new units tend to depreciate initially before going up in value.

    Older units are usually, more spacious and will more likely appeal to the owner occupier in the future once the trend shift occurs.

    The largest potential buyers in the unit market is the baby boomers and as the population ages this generation of people will look to the unit market while choosing to downsize. At this stage developers are simply trying to squeeze as many dwellings as possible onto a site. This leads to compromise in living space therefore, the majority of the units on the market does not suit the owner occupier market.

    The time will come soon when developers will start catering for the owner occupier market as right now the majority of units are purchased by investors.

    Comment by Sailesh Channan — October 21, 2011 @ 9:21 am

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