Real estate markets are sending mixed messages to property investors considering whether to buy a detached dwelling or apartment at the start of the peak spring selling season.
Apartment prices and sales volumes are picking up after hitting the bottom of the market, according to valuers and banking analysts. Melbourne, Brisbane and Adelaide’s apartment prices are at the bottom of the market, Sydney is approaching it and Perth continues to decline (despite a sharp pick-up in mineral exports that triggered the last real estate boom), according to national valuer Herron Todd White.
Spring is traditionally the busiest time and there are hopes that an influx of new properties will end a two-year sales slump.
Apartment prices are showing early signs of recovery, having posted gains of 2.6 per cent, or nearly nine times the returns on houses for the past three months, according to global investment Morgan Stanley, which believes the market has stabilised.
Prices for detached dwellings in mainland real estate capitals are also languishing close to the bottom of the market, except for Sydney which still has some way to fall, accordingly to HTW. Canberra is at the top of the market and Adelaide is approaching it, it claims.
But long-term capital gains on houses continue to be better than apartments, according to Morgan Stanley.
Over the past six years the median – or middle – price of detached dwellings has been about 14 per cent higher than apartments, or $620,000 for a detached dwelling compared to $530,000 for an apartment.
“It’s too early for a post-election rebound,” Morgan Stanley analysis concludes. Shane Oliver, chief economist for AMP Capital, agrees. He expects low, single-digit returns through to the end of 2020.
“That means investors need to look at longer-term returns, total costs and net returns rather than hope for big price gains,” says Cate Bakos, a buyers’ agent.
Spring is traditionally the busiest time for sales and there are hopes that an influx of new properties will end a two-year slump across the country.
Buyers and sellers are encouraged by a sharp improvement in auction clearance rates, rising prices, falling interest rate and improved investor confidence after the federal election.
But volumes have been low and lenders are maintaining tight controls over who qualifies for a loan, despite regulators easing buffers used to assess whether a buyer can comfortably meet repayments.
Bakos says an attractive, well-constructed property in a popular postcode located near transport and other amenities, such as shops or the beach, will outperform whether it is an apartment or a house.
An over-supply of apartments in the major capitals improves prospects of finding a bargain, involves less maintenance, such as lawns and gardens, and can be bought in popular and populous inner urban areas.
But there are well-publicised problems with high-rise apartments involving shoddy construction, use of dangerous materials and uncertainty about who is responsible for rectifying construction mistakes.
That has been ringing alarm bells for cautious lenders who are imposing higher rates and tougher terms and conditions on borrowers.
For example, Citi, the Australian division of the global banking powerhouse, has increased minimum deposits for high-density apartments to 35 per cent of the property value, which compares to about 20 per cent for most purchases.
Recent analysis by BIS Oxford Economics revealed that two in three Melbourne apartments sold off the plan during the past eight years have made no price gains, or have lost upon resale, despite most of that period having benefited from boom prices and record immigration.
In Brisbane, about half sold at no profit or at a loss over the past eight years, while for Sydney, it has been about one in four since 2015.
Simon Pressley, head of research for buyers’ agent Propertyology and a scathing critic of recent inner-urban high-rise residential construction, says buyers should consider older, low-density blocks of four to 10 apartments, typically built in the 1970s.
“Those rock-solid yellow and red brick complexes continue to retain their value,” Pressley says.
Need to know
Buyers need to familiarise themselves with strata title by-laws, such as having pets or seeking permission for renovations, and the administrative fund used to cover general costs, such as cleaning, utilities and running expenses.
Recent problems with high-rise constructions underline the importance of knowing how much is in a building sinking fund, which cover major capital outlays, such as repairs and maintenance as well as unforeseen expenses from structural damage.
Detached dwellings are usually more expensive but provide greater freedom than a strata title property to add value by renovation, expansion or upgrading.
“It’s fair to say that despite the reported signs of green shoots, 2019 remains a buyer’s market in this city,” says Perron King, Melbourne director of Herron Todd White.
“Buyers are not as rushed as they once were and now have time on their side to look at all the options when considering a purchase,” King says.
This also applies to other mainland markets where activity continues to scrape along the bottom.
Lenders are also keen to do deals with attractive borrowers,typically those with a 20 per cent deposit and regular income that will comfortably cover total spending for the foreseeable future.
Mortgage brokers claim lenders will discount headline variable rates by up to 200 basis points for a borrower who ticks all the prudential boxes.
Headline rates on the cheapest one- to three-year fixed rates are below 3 per cent. Borrowers should check the headline rate with the comparative rate, which includes all the lender’s fees and charges.
Bakos says detached dwellings in major metropolitan areas are unlikely to deliver gross rental yields above 3 per cent. Blue chip properties north of $2 million are unlikely to deliver more than 2 per cent gross rental yields.
“Those reliant on higher yields should consider an apartment,” she says.