Surging Interest in Apartments Amid Home Affordability Crunch

In a recent twist to the Australian real estate market, apartments have begun to outshine houses in terms of price growth in almost all capital cities, a phenomenon detailed by John McGrath in his article ‘Unusual’ issue hitting home prices hard. Over the last quarter, this shift has been notable in every capital city except Darwin and Canberra, highlighting a significant adjustment in buyer preferences and market dynamics.

The traditional narrative has always seen houses appreciate faster than apartments due to the inherent value of land and limited supply. However, McGrath points out that “Apartments also outperformed houses in regional NSW and Victoria over the period,” signaling a broader trend. The driving forces behind this shift include strained affordability, with McGrath explaining, “When you apply for a loan today, your lender is going to add a 3 per cent buffer to the home loan rate – as per APRA guidelines.”

This affordability crisis is pushing many towards more economically feasible options like apartments or townhouses, particularly in high-value markets like Sydney. McGrath notes, “When affordability is strained, one of the obvious compromises to make is switching aspirations from a house to an apartment or townhouse, and that’s what some people are doing.”

Furthermore, the surge in apartment prices is supported by strong demand from specific buyer segments. According to the latest data from the Australian Bureau of Statistics (ABS), “37.1 per cent of new home loans issued in May went to investors, which is the highest level in eight years,” highlighting a renewed interest in investment properties. Additionally, first home buyers are significantly active, with their loans comprising “28.7 per cent of new owner-occupier finance, well above the decade average of 24.6 per cent.”

The lack of new supply also exacerbates the price increases. McGrath underscores the challenges facing residential developers such as tradie shortages, high costs, and difficulty in obtaining council approvals, noting that “approvals for new apartments, townhouses, and other strata-title dwellings were 22.1 per cent lower in June compared to June 2023.”

Despite the hurdles of entering the housing market, McGrath offers a silver lining for those considering apartments or townhouses. “Firstly, you’re often taking a substantial step down in price when you choose to buy an apartment over a house,” he explains, adding that this shift can offer buyers financial relief and the ability to purchase higher quality homes or in better locations.

In conclusion, while the current market dynamics may seem daunting for many prospective homebuyers, McGrath’s analysis offers a nuanced perspective, encouraging buyers to consider the long-term capital growth potential of well-located, high-quality apartments and townhouses. As affordability remains a key concern, the market may continue to see a preferential shift towards these alternatives.

References:

https://www.realestate.com.au/news/unusual-why-apartment-prices-are-rising-faster-than-houses/