Why apartments might be a better investment than houses

For generations backyards, barbecues and big houses have been the norm for Australian home owners. But what of future generations?

Some demographers suggest we are 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 we’re we are 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 that 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% of all accommodation; however by 2006 this had dropped marginally to 74%.

While 4% 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 with the vast number of detached homes on the market.

The report suggests there are potentially thousands of tenants and home buyers out there who simply cannot find the type of accommodation they are seeking in the places they most want to live.

Author of the report Jane-Frances Kelly says there is 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 20 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 on line in the next year or two.

In fact, I’m concerned that there will 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, council restrictions, the resistance of 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 public 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 will need to embrace the apartment culture.

This should not be a real problem, as fortunately our lifestyle preferences are changing, with many gen Ys 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 would 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 a director of Metropole Property Investment Strategists who create wealth for their clients through independent, unbiased property advice and advocacy. He is best-selling author, one of Australia's leading experts in wealth creation through property and writes the Property Investment Update blog.