Are the tables turning on apartment and house markets?

Houses and apartment prices have broadly remained in step over the years, however, houses have generally been seen to deliver higher growth while units have experienced less volatility and been more resilient in downturns.

Apartments in some parts of Melbourne have exhibited lacklustre performance, moreso than other capitals around the nation.

But the question nationally is, will established apartments rebound or are houses always going to outperform the unit market?

First, we have to look at the reasons why some capital city apartment markets (in particular, Melbourne) underperformed for a long period.

Investors generally are reluctant to spend a similar budget on their investment property compared to their family home. 

As well as the property's price, rental yields also contribute to many investors’ decisions to target apartments.

Secondly, our capital cities are sprawling further into the distance. Houses have been in demand as first home buyers have targeted house and land packages, and also as our net migration has continued to grow. Outer suburban house and land prices have broadly matched the prices of inner-ring apartments.

Interest rates were in decline from 2011 to 2022, a period that saw significant house price growth. Contrasting this house/unit price movement chart with the same period’s cash rate chart certainly shows a correlation between house price outperformance and the cost of credit.

The reduction in spend capacity is having a direct impact on consumer choices, as interest rates soar and limit the budgets of property buyers and investors.

The graph below shows consumer engagement on realestate.com.au for both houses and units, with supply of, and interest in, apartments holding up as the rental crisis has worsened.

Affordable property rising fastest

Focusing more specifically on the upper, middle and lower price ranges, we can see that the most affordable segment of the market has experienced the highest recent capital growth rates in correlation with increasing interest costs and tougher household affordability conditions.

Units are becoming more attractive as buyers make compromises over space for location.

What is also really interesting to note is the shift in household sizes and how this has reduced over the years. Covid created some immediate spikes, but looking more generally at this chart shows that shrinking average household sizes are more conducive to apartment living than in previous decades.

Another interesting point relates to the ratio of house prices to unit prices.

The gap has widened the most in recent years; potentially hinting at an opportunity for investors to target quality apartments while the differential in price points is at an historical maximum. Should the gap return to more historical norms, unit investors will be the winners.

But one significant change that must be noted relates to apartment building starts and future completions.

The data below shows the scale of the reduction in apartment building activity in Melbourne, as an example, and it doesn’t appear to be increasing in the short to medium term.

Rising building costs, the challenges presented during the pandemic, and the oversupply issues that hampered a lot of developers a decade ago have contributed to the problem of undersupply now faced now in many capital cities.

There are some compelling reasons supporting a rebound in apartment capital growth performance but like any dwelling type, location counts for everything, as does land to asset ratio and the physical quality of the property itself.