Houses or apartments -What’s the better investment?

May 1, 2014

5 May 2014

Asking a property buyer whether a house or an apartment is a better investment is like asking which football team they support. The question tends to generate strong views.

In “team apartment” there are arguments for higher density living, demographic change, downsizing and the rise of single-person households.

“Team house” likes to point to stronger historical capitol growth and argue that the value of a property is in its land.

So what is the reality of the situation? Do houses make better investments or are apartments just as attractive?

The answer is that it depends on your budget, investment strategy, timeframe and beliefs about future living trends.

“Historically, houses have outperformed apartments when it comes to capital growth whilst apartments generally secure a higher rental yield,” says Catherine Cashmore, Buyer’s Advocate, Media Commentator and Journalist.

“Tenants tend to place more value on the space inside the property, which is why apartments attract yields of around 4 – 4.5% compared to houses at around 3 – 3.5%. If there is a good strata manager for the property and a healthy sinking fund, apartments should also attract lower maintenance costs.”

In terms of what drives property values, popular arguments should be taken with a grain of salt.

“The argument I hear most often is that everyone is downsizing because they can’t afford houses or they want to be closer to the city but there is only a small percentage of truth in this. The reality is that 60 – 70% of apartments are owned by investors and are popular with young renters. Owner occupiers, even first-home buyers, tend to prefer larger properties in outer suburbs,” says Catherine.

“We are also led to believe that baby boomers will rush to apartments when they retire. However there is no evidence of this. In fact, studies show that most baby boomers intend to hold on to their family home as long as possible. When they do sell, most will look for houses on smaller parcels of land.”

As for arguments about the value of land, it is hard to ignore the fact that more than 80 per cent of the value of all housing stock in Australia resides in the land.

Putting the various arguments aside, Catherine says that what’s important is to be flexible and make the decision in the context of your current and future financial objectives.

“There is no need to follow just one strategy. The key is to get the fundamentals right such as a good location, a quiet street and tenant type. Choose a property that will appeal to the predominant buyer and tenant in the area.

Catherine suggests people think outside the square to find interesting growth options. “People focus on houses and apartments, but often overlook the middle ground – such as villa units, which offer more space and some land but without maintenance costs.”

 

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