The question of what is a better investment, a house or an apartment, is one I am most often asked.
When purchasing an investment property, if your budget allows you to buy a house, townhouse or a villa unit with a yard in a good location, this is the best investment option for long term capital growth. Over recent years, Melbourne house prices have outperformed apartments. Houses display stronger capital growth rates due to appreciating land values. Apartments on the other hand generally provide a higher periodic return on your investment.
As the market rises, more and more investors are being priced out of the housing market and are unable to afford a house on a good size block of land in their preferred location.
If your budget does not allow you to buy a house or townhouse in a nice area, and you want to get into the property market, then you should consider an apartment in your chosen area, preferably one which is in a smaller complex and in a good location, close to amenities. A small apartment complex means the land component of each apartment is more. The apartment must also be well constructed, in a good neighbourhood and be spacious, making it family friendly. This will increase the possibility of it appreciating in value more over time.
Short term, while our Australian borders remain closed to the rest of the world, we don’t have the influx of new migrants arriving on our shores and looking to set up home, which subsequently increases demand and drives prices higher. As many migrants, particularly from Asia are used to living in apartments, the closed borders mean apartment prices will remain subdued.
There are not many apartment projects currently under construction. Long term, when our borders re-open and migration recommences, we could have a shortage of apartments as demand increases. This will inevitably drive prices of apartments higher.
The biggest gains will be made with apartments that are family friendly in medium to low density buildings. Considering the structural and building problems in recent years, the cost of construction of new apartment buildings will increase. This will in turn, push up the price of new apartments and hence the value of well-established apartments will also rise.
For investors who are looking for a higher yield, apartments will give you a higher rental income than most houses will. The lower price tag and greater regular income from apartments means they are cheaper for investors to buy and hold on to. For those looking for greater capital growth you can’t go past land or a house on a large block of land. As you now know, it is the land component of property that increases in value over time, whereas the capital improvement on the land, (the building) depreciates in value.