Apartments or houses – which make a better property investment? And why? | Pete Wargent

Apartments or houses – which make a better property investment? And why chose one type of property over the other?

Today I’d like to make the case for investing in medium density dwellings, and I’d like to start with a little story to illustrate why.

Where I grew up in Sheffield in northern England we lived in a bail hostel for young offenders as that’s where my Dad worked.

The suburb was Norfolk Park known for its many high rise tower blocks. But after my old man had worked at the hostel for some time we moved out 10km of the city to suburbia and lived in a 3 bedroom brick house.

That’s how things were back then

The middle class and the better off working class people bought a house out in the suburbs, lower-income working class people moved to a house on a council estate or lived in the high rise tower blocks.

In cities like Sheffield people never much thought of the concept of a “classless society”.

People tended to “know their place” and just went with it.

[sam id=40 codes=’true’]Sheffield was well known for some of most spectacular housing schemes you could imagine: Hyde Park, Kelvin, Park Hill and, where we lived, Norfolk Park (though Glasgow’s notorious Red Road scheme probably trumped them all).
The style was known as “brutalist” architecture.

When the first British tower blocks of flats were built – the word apartment was not used back then – they were generally seen to be progressive and were certainly an improvement from the Victorian slums and World War II bombed-out wrecks that had been cleared to make way for them. The residents often benefited from the fantastic views experienced when high-rise living.

Developments such as Sheffield’s Park Hill included some ingenious ideas.

Streets in the sky where milk floats could deliver milk to your door, huge incineration chimneys, schools within the estate and even pubs and shops built into the blocks for the estate dwellers.

Interviews with the first residents showed that they were genuinely happy to be living in developments where in an individual unit they had an indoor bathroom and running hot water instead of the traditional working class “p*ss pot” and outdoor facilities.

The failure of the scheme

Yet overall the housing schemes are now gloated about and largely seen as having been an abject failure.

The concrete which was a key aspect of brutalist architecture (as it could be poured on site) quickly became unsightly and stained by pollution. Poor building quality and design led to leaks, cracks and decay, and fire safety was a concern.

The experiment of tower block communities didn’t work as planned.

Some blocks descended in pure lawlessness, with vandalism, muggings and break-ins common, not aided by the mazes of dark corridors that many developments included.

Some of the developments were particularly hastily constructed and to many the tragic collapse of the Ronan Point tower block in London symbolised the collapse of faith in tower block schemes.

Many tower blocks had become the new slums.

Today, Sheffield’s blocks such as the Kelvin, Hyde Park and Norfolk Park developments have been demolished. Meanwhile Park Hill is set to be given a new lease of life by developers, if they can ever get the project completed.

Apartments for investment today

How times have changed in a generation!apartments_PropertyUpdate

Today it is very common to see apartment-dwelling as a popular and convenient choice. Those who choose to live in units can live close to amenities and work in great lifestyle suburbs and trade space and a backyard for a balcony and location.

People sometimes ask me why I invest in townhouses and apartments rather than simply buying houses. After all, in an apartment complex there are often strata fees to pay, and what of the old real estate adage, that “land appreciates while buildings depreciate”?

Strata fees can indeed be a painful expense, so I’d try to avoid buying an apartment where the strata fees are too high, but it should be remembered that much of what strata fees are levied for represent costs that house-owners may also incur.

As for the land appreciating argument, there is a grain of truth in that statement, but ultimately what an investor in housing is looking for is growing demand for a commodity in limited supply.

For this reason, investors should be wary of investing in remote areas which may become over-supplied.

This chart is often produced in articles as cast-iron proof that property in Australia is dead and buried as an investment class. I’d tend to agree that if your plan was purely in effect to buy the house price index you would probably be looking at a poor outcome.

Property investors need to be cannier than that in a number of ways: buying the right property at the right price, and acquiring properties they can add value to.

In particular, they need to be able to identify specific types of property for which demand is booming in capital growth suburbs.

We know that the population in each of our four major capital cities is booming, but what leads me to invest in the medium density type dwelling? Here are just 3 of the reasons:

1 – Affordability

Housing affordability is a much-discussed topic in Australia.

The chart above shows house prices have certainly increased markedly over the past two decades though it of course helps repayment capacity that the interest rate is now 3% instead of 15%.

There is little value in reproducing too much in the way of ‘median’ price data here for figures vary between data providers and cities significantly, but it is certainly the case that the median price of a unit or apartment in the major cities can be 30% or more less than the price of a house.

The gap may be less pronounced on an Australia-wide basis for the simple reason that outside the major cities there are fewer units. But then, I wouldn’t suggest investing in units in lower demand areas in any case.

Investors are impacted by affordability too, and often elect to buy apartments for the lower entry cost as well as maintenance that units can entail.

2 – Downsizingashfield apartment 2

The “downsizing Baby Boomers” argument is such a can of worms I almost daren’t open it!

Is it happening?

There are arguments on both sides of the demographic fence in truth.

Average superannuation pay-outs are steadily increasing as those hitting the retirement age have increasingly having spent longer a longer period making contributions. The average pay-out for males is now around $200,000 and closer to $100,000 for females.

While I don’t want to be the bearer of unhappy tidings this article explains the potential shortfall. While we should happier that on average we are living longer, incomes for many will be very modest.

Refer back to the chart above.

There is some good news for retiring Baby Boomers and that is those who have owned their homes for a long period of time have equity tied up therein which they may use to fund their retirement. One way in which they may do so is to downsize into medium-density dwellings.

But who is going to buy the ageing houses on large blocks in the outer suburbs in the future?

Yes, Baby Boomers will begin to hit retirement which will put a strain on government budgets and aged care resources, but as we know the numbers in the workforce and being pumped up by massive population growth.

The trouble is that, these days, we all seem to want to live close to four of the capital cities!

This report from the Grattan Institute discusses how Australians are increasingly choosing medium-density dwellings as their lifestyle of choice.

3 – Falling household sizes

The real crunch for the future of Australian property is that average household sizes are close to their lowest point ever and have been projected by the ABS to fall even further by 2026.

This creates a huge problem for planners as not only is the population growing at a frantic pace (360,000 people in 12 months) we need more properties to house the existing population.

How to be a winner

Statistics sourced by the Reserve Bank show that theoretically in Australia we are building close to enough new housing to accommodate the population, but are we building the right properties in the right locations?

The answer is no.

In fact, in some areas, we are actually building too many apartments – the CBD of Melbourne is an example.apartment

The future winners in investment property will be those who secure at the right price quality established apartments in inner- and middle-ring suburbs where the demand is huge but the supply constrained.

I’ll leave it to Australia’s leading property adviser Michael Yardney to round this off:

“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.

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 online.

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.”

[post_ender]



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Pete Wargent

About

Pete Wargent is a Chartered Accountant, Chartered Secretary and has a Financial Planning Diploma. He’s achieved financial freedom at the age of 33 - as detailed in his book ‘Get a Financial Grip – A Simple Plan for Financial Freedom’. Pete now manages his investment portfolio, travels and works as a consultant in the finance industry from time to time. Visit his blog


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