Apartments breaking the adage that houses are better performers

• Unit prices have retuned to the 2022 peak.
• Apartment supply continues to be hampered by low approvals and high costs.
• Less than 50% of dwellings in Australia are units

The adage that houses perform better than apartments could be on the way out, as the latest data shows the sector outperforming old faithful.

While the last 12 months have seen house and unit prices closely match each other’s growth, according to Ray White, unit price growth was ahead of houses in Brisbane.

Across the country, unit rental price rises trumped houses, increasing twice as fast.

Over the course of the 2022-2023 financial year, Australia’s median house and unit prices both recorded a 3% growth.

With the national median house price growing from $739,542 (June 2022) to $761,543 (June 2023) and units seeing growth from $483,998 (June 2022) to $498,483 (June 2023).

Australian median price by property type ($)

Covid caused the apartment market to fall on hard times

Over the course of the pandemic, house prices rose at a faster rate than units due in part to consumer preferences.

Ray White chief economist, Nerida Conisbee, said the benefits of an apartment lifestyle during this period were stripped away as many found their apartments too cramped during lockdowns, there was no benefit in living close to the office as most workers worked remotely from home, and the CBD become desolate with little foot traffic and no nightlife.

This saw people switch from an apartment lifestyle to a house in the suburbs and more regional areas.

Factors impacting the revitalisation of unit prices

Demand for the CBD lifestyle has made a strong post-pandemic return, with apartment price growth reflecting the comeback.

The attractions of CBD living are not the sole driver of demand, with a changing demographic also at play.

Improved quality and luxury offerings are one factor, with affordability being another large driver; families looking to reside in the catchment of top schools may find detached housing unaffordable, but units present a reasonable entry point.

Younger generations may also wish to reside in desirable areas, however, units will be the only affordable option.

Shenton Park in Western Australia is one example of the shift towards family living, said Conisbee.

“A lot of the people that want to send their kids to Shenton College are choosing to buy an apartment so they can get into the school catchment area,” said Conisbee.

“We have seen a shift in what’s being developed, so there are more three-bedroom apartments, they are more suited to families.”

The prohibitive cost of building apartments

While affordability is an appealing factor for the end user, it is a very different story for those building them.

New unit approvals have been declining over the last few years, with building approval levels recently hitting decade lows.

“One of the issues we have at the moment is the level of development taking place is quite low for apartments, and the reason being is that we have seen an incredible rise in construction costs, so it’s getting really expensive for developments to be built.”

Nerida Conisbee, Ray White Chief Economist

“On one hand it means that fewer projects will be built, so that will force people into buying existing apartments, but it also means that the apartments that do get built will be more expensive, so there’s kind of a two-step process taking place; it is likely we will continue to see decent increases in apartment prices over the next couple of years,” added Conisbee

While the supply shortfall is unlikely to change soon, the strong price and rental growth may instil some confidence in apartment developers.

House and unit dwelling approvals

Unit growth within the capital cities

Australia’s most populated cities, Melbourne and Sydney, have managed 1%-2% growth in median house prices over the last financial year, yet both cities failed to crack 1% growth for the median unit price.

A contributing factor to this small growth is that units in these cities are aimed at students and younger people and hence are set to a lower price point.

“A lot of the Sydney unit developments that have taken place over the past decade have been aimed at students,” said Conisbee.

“Particularly Melbourne, if you have a look at Inner Melbourne, and the Melbourne CBD, a lot of the apartment stock is aimed at students. Similarly in Sydney, in places like Parramatta and North Ryde, those locations tend to be at a lower cost.”

Sydney and Melbourne median price movement

Source: Ray White.

Brisbane and Adelaide, however, have seen median unit prices grow faster than house prices. Brisbane, in particular, has seen growth in the unit market, as there has been strong demand from both students and owner-occupiers for apartments.

“Brisbane is quite different from Melbourne and Syndey because it does have apartments that are aimed at students, but also has a lot more owner-occupier apartments as the proportion of total apartments being built in those cities,” said Conisbee.

Brisbane and Adelaide median price movement

Source: Ray White

Houses reign supreme

Australia’s capital cities have relatively low density when compared to other major cities around the world.

Unit numbers far outweigh houses in London, comprising almost 94% of dwellings in the British capital; similarly high ratios were seen in Singapore.

Australian cities saw units comprise substantially smaller proportions of dwelling types, with three cities seeing around one quarter of housing stock comprising apartments.

Units as a proportion of house and unit dwelling types

Hobart has the lowest proportion of any Australian capital city, with 15.4% units in proportion to total dwellings.

This has caused many challenges for downsizers and those on lower incomes, particularly students wishing to study in Hobart, due to the shortfall of unit stock.

“Hobart doesn’t see much development taking place, so there is a real shortage of apartments.”

Nerida Conisbee, Ray White Chief Economist

A consequence of lower density includes urban sprawl.

This results in cities becoming more expensive to service, and younger generations and those on lower incomes are typically forced out of established suburbs.

While those looking to downsize, but remain in the area, can find it a challenge to secure accommodation due to the lack of higher-density housing.

“One of the problems that’s always been is that housing is not unaffordable everywhere, it’s just unaffordable in places, in the places that people primarily want to live in,” said Conisbee.

“By making sure that we have high densities and nice apartments, it allows younger generations to move into those areas.”