John McGrath - Houses Are Booming But Apartments Offer Value
With so much discussion about the booming market these days, I feel concerned that one of the greatest buying opportunities we will ever see for young people and investors is being overlooked.
That opportunity is in the apartment market, specifically the highly desirable inner city areas of Sydney and Melbourne that offer exciting New-York style living in the heart of the CBD as well as leafy suburban options with convenient train or tram transport with 5-10km of the city centre.
COVID’s impact on Australia’s apartment market has been vastly different to houses. It’s been largely negative and apartment values are mostly weaker as a result, particularly in the inner city which is arguably the most attractive place to buy your first home or a long term investment.
However, the opportunity to buy high quality apartments at discount prices is very short term. You basically have until the international border re-opens to take advantage of it. Here’s why.
COVID has led to a continuing decentralisation of inner city populations around the world. The rising trend in working from home means people are swapping apartment living in expensive inner city areas for houses in the more affordable middle and outer ring suburbs - or regional areas instead.
This is an extraordinary situation given that it wasn’t so long ago that living in the inner city was very aspirational. Buyers have long been willing to pay a premium to live close to work and all the action that big cities have to offer, including a vast array of recreational, cultural and culinary amenities.
Then came COVID and everything about inner city life changed. City offices sent workers home, restaurants, theatres and nightclubs closed down and our big city centres lost their buzz.
Apartment rental values were hit first. Thousands of young CBD workers in tourism, hospitality and retail lost their jobs and promptly left the inner city to move back in with mum and dad. Others joined with friends to relocate away from the city where they could afford to rent a house.
Overseas migration was shut down, which had a big impact on Sydney and Melbourne because 75% of Australia’s migrants choose to settle here and most of them start their new lives in apartments.
This led to a substantial weakening in rental values, which deterred investors from buying. Then owner occupiers began to leave because working from home meant they could upgrade to a house in cheaper locations.
The result of all of this is that young people and investors now have a once-in-a-lifetime opportunity to buy much more affordably in premium inner city areas, where capital growth is usually superior.
Make no mistake on this one. Inner city living will be back in vogue in no time. Once we are all vaccinated and the international border re-opens, businesses, jobs, migrants and big recreation will return to the CBDs of Sydney and Melbourne in a big way and property values will recover fast.
COVID is short term. Property should always be long term. So why not “buy the dip”?
The greatest opportunity is in Sydney CBD, where asking prices are down -$145,000 compared to a year ago at a median of $835,000, according to SQM Research.
On the Lower North Shore - which is also part of Sydney’s inner city or inner ring, asking prices have dropped from $940,000 to $875,000. In the trendy Inner West, asking prices are down from $795,000 to $720,000.
In Melbourne City, the discount on apartment asking prices in the CBD is -$21,000 at a median of $550,000 today. In the Inner East, asking prices are down from $660,000 to $630,000.
A recent article in the Australian Financial Review pointed to individual suburbs where apartment values had fallen the most over the past year. In Inner Melbourne, it was Ascot Vale at -9.7%. On Sydney’s Lower North Shore, it was St Leonards and Chatswood at -8.4%, according to CoreLogic.
The same article also revealed a two-tiered apartment market, with prices rising strongly for larger lifestyle apartments in city beach zones and regional seachange and treechange areas. The data revealed that 14 suburbs had experienced more than 20% price growth over the past year.
In NSW, they included Lennox Head at 27.6% and Avalon on Sydney’s Northern Beaches at 12.9%.
In Victoria, they included Ocean Grove at 26.3% and Torquay at 25.8%. In Queensland, Gold Coast suburbs Palm Beach, Bilinga, Currumbin and Tugun averaged 22.8% growth. In Brisbane, apartment values rose in the Bayside suburbs of Cleveland and Wynnum by 25.1% and 18.6% respectively.
It goes to show that when unexpected, outlier events like a pandemic disrupt the normal operations of our property market, you have to look carefully for the opportunities they bring.
Just as soaring house prices are giving long term home owners the chance to fully capitalise and make extraordinary money from capital gains, soft inner city apartment values are giving young buyers and investors the buying opportunity of a lifetime. Don’t miss your chance.
The views expressed in this article are an opinion only and readers should rely on their independent advice in relation to such matters.
This article originally appeared in The Real Estate Conversation (April 26, 2021)
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