Investopoly Why did apartments miss out on the recent property boom?
It’s been well documented that property prices rose significantly over the course of 2020 and 2021. According to the Real Estate Institute of Australia, median house prices in eastern capital cities rose between 30% to 40% over those 2 years.
However, unfortunately apartments underperformed compared to houses in a big way. I wanted to discuss why this occurred and consider what growth prospects apartments might provide in the future.
Apartment prices are low relative to houses
The chart below compares the median price of apartments to median price of houses from March 1980 to March 2022 (source: REIA). On average, the median house price has ranged between 1.2 and 1.4 times higher than the median apartment price in Melbourne and Sydney.
However, since house prices increased strongly during 2020 and 2021, the median house price is now almost 1.6 times the median apartment price in Sydney and Brisbane, and over 1.9 times in Melbourne. This is because the price of houses rose strongly over this time whereas the price of apartments barely changed.
Covid negatively impacted apartment values
Apartments are typically owned by people on lower incomes or investors.
It has been well documented that lower income earners suffered the most during Covid lockdowns, as typically their occupations do not lend themselves well to working from home and/or their industries were closed e.g., hospitality and retail.
Investors that owned apartments during Covid were asked to provide rental discounts/waivers and were restricted from vacating tenants and/or increasing rent.
Consequently, throughout 2020 and 2021, apartment vacancy rates rose, rental incomes fell and of course, investors avoided this segment of the market.
Conversely, Covid had a positive effect on house prices
Homeowners tend to earn higher incomes than apartment owners, especially in blue-chip suburbs. These higher income earners were able to work from home during lockdowns and as such, they didn’t suffer any reduction in income. In fact, because they were in lockdown, they found they saved a lot more money which strengthened their financial position.
Falling interest rates also helped higher income earners as it increased their borrowing capacity and ability to service debt. Together with an increased focus on lifestyle such as having a home office and/or relocating to a tree or seasi
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