All Property values rise in Growth Markets - or do they?

Nick Lockhart
Nick Lockhart
December 8, 2019
Property Investment
All Property values rise in Growth Markets - or do they?

REMEMBER the days when it didn’t matter what type of property you owned? Once upon a time if the market in a particular location was rising, the price of every property went up, regardless of what it was.

Investors could be confident that ‘a rising tide would lift all ships’. But times have changed and nowadays, selecting the right property is even more crucial.

Houses are the best performer and generally the best property type to buy, budget permitting, followed by terrace houses (with individual titles) and perhaps select boutique townhouses, with apartments best avoided.

Property investors have revised their investing strategy to suit the changing times, and at MRD we’re no different. To support our clients in building long term wealth, over the last five years we have shifted our focus from medium density to low density – that is, primarily houses.

What’s changed? Many things!

The major reason apartments are no longer desirable from an investment perspective is that a proliferation in development has meant there are now so many of them, while the number of houses – particularly on larger blocks – is diminishing.

 It’s this scarcity factor for houses that leads to greater price growth for this property type over and above others. Demand outweighs supply for houses and the buyer competition for the limited number of houses pushes prices up. On the flipside, demand for apartments is now lower than supply. In many areas there is an oversupply, which means price growth is restricted as there is less buyer competition. If the price of one apartment is too high, generally you can go and find another fairly similar one for a cheaper price because there are so many to choose from.

The other factor detracting from the attractiveness of apartments is the fall in quality. These properties used to exist in boutique, small three-level complexes, built by father and son businesses. They were sturdy with generous room sizes. Now they are massive, high-density, high-rise developments, built by large companies, often with subpar workmanship and pokey room sizes.

The apartment cracking crisis we have seen in Sydney in particular, with the Mascot Towers and Opal Tower developing cracks, is a reflection of quality standards having deteriorated over time. Proper checks and balances via inspections have in many cases gone out the window in order to keep up with construction demand. The oversupply of these substandard apartments in many parts of the country has not only cost owners’ substantial sums of money but resulted in a glass ceiling being placed over the values of the entire apartment market.

What’s more, the construction of high-density developments is here to stay. Whereas councils once approved developments based on need, now the approval process seems to be driven by councils focusing on their bottom line.

The more dwellings that can be squeezed into an area, the more money for council via rates from a higher number of unit owners and the less additional services they have to supply.

What do you do if you own an apartment?

For apartment owners – including myself! - the news that houses are now the best investment choice may be a little disconcerting.

MRD’s decision to sell apartments in the past – up to 20 years ago - was based on historical evidence that pointed to far better results. Owning apartments meant better tax incentives and less maintenance, when compared with houses. This made them the investment choice of many property investors. Apartments offered a more set and forget investment that grew in value.

Unfortunately, there was no crystal ball to tell us what will happen in the future, particularly in relation to the fallout from the GFC and the major town planning changes which have ushered in an era of very high density living, with apartment developments saturating many markets.

Now, however, we have the benefit of hindsight and we know that with changed market forces, what worked then doesn’t work as effectively now and houses are a better first choice.

Well-selected apartments, particularly those that appeal to owner-occupiers or have some wow factor such as a great view, can still be a solid investment. But at the end of the day, anything’s worth comes down to scarcity, or supply and demand. Houses will continue to outperform apartments because the supply of land is finite. Compare this with apartments where, volumetric construction means they can keep building up long after the land runs out. If your portfolio includes apartments it may be time to reassess your strategy, which all property investors should do on a regular basis in any case. If your money would be better off invested in a house rather than an apartment you may be better off divesting the asset and redistributing the funds. The best course of action is to look forward and take whatever steps are necessary to continue building your wealth.

Investing in property is a business, so think like a business owner and find the right solution for you.

As John Maxwell once said: “The pessimist complains about the wind. The optimist expects it to change. The leader adjusts the sails.”

Click here to book a strategy session with MRD in the New Year to ensure you’re on the right growth path and can hit the ground running in 2020.

Nick Lockhart

Nick Lockhart

MRD Property Expert
Nick is the Founder of MRD. Nick is in his element when he is inspiring, mentoring and teaching safe and responsible finance and investment strategies.

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