Houses vs apartments: Which will perform better over time?
The house vs. apartment debate is not as simple as it seems. If you’ve always been under the impression that houses are better for growth than apartments, the below is sure to challenge that perception.
Price movements are a result of the imbalance of supply and demand. Despite the general consensus, property price growth is not exclusive to either a house or an apartment, it’s driven by the balance of supply and demand in a specific location.
Understanding demographic shifts and identifying future demand is critical to buying the right type of property. As our household sizes in our capital cities continue to shrink, property demand is changing. For an investor buying a house in the ideal suburb isn’t always possible from an affordability perspective. But with the right research and guidance the same results can be achieved at a lower purchase price, with a stronger cash flow and arguably stronger growth potential.
The graph below tracks the movements in median house and apartment price in Brisbane since December 2003.
The last growth cycle in the Brisbane market occurred between 2003 and 2009. Here’s how apartments and houses fared over that period.
Brisbane Growth Rate 2003 – 2009
The performance of both markets was essentially in line. That’s not too mention that rental yields on apartments are approximately 20% higher than those for houses.
If we refer back to the graph we can see that the last 3 years have seen houses outperform apartments. This is largely because of an increase in apartment supply in specific areas causing saturation and leading to price declines. These falls have been detrimental to the overall apartment performance of the city however, there are many suburbs within Brisbane which have less exposure to supply risk and their performance has remained positive.
Brisbane’s not just one market, there are many micro-markets within the city. The key to investing is understanding the capital city cycles but also having a deep understanding of the markets within that market. Let’s take a look at two Brisbane suburbs:
7 kilometres from Brisbane
Median house price of $1.57 million
Median apartment price of $495,000
Currently 102 apartment dwellings under construction
7 kilometres from Brisbane
Median house price of $960,000
Median apartment price of $490,000
Currently 665 apartment dwellings under construction
Although median apartment prices are in line, the Ascot apartment value proposition is much stronger, highlighted by the significant disparity between house and unit prices. This will drive apartment growth. The other key difference is the amount of supply. Although neighbouring each other, these are two completely different markets.
As a result of minimal supply, Ascot’s apartment market performance has been quite consistent, as seen below.
In markets with low supply we find that the apartment market performs just as well as the housing market. We collected sales data from homes and apartments which were bought and sold at the beginning and end of the last growth cycle to determine which performed stronger. To compare each property’s performance, we’ve annualised the growth rates achieved.
Compounding annual growth rate
2/1 Napier St
3/70 Beatrice Tce
6/90 Racecourse Rd
62 Abbott St
100 Beatrice Tce
8 Bale St