The accepted wisdom that an apartment is a stepping stone to buying a house is being called into question as the gap between unit and house prices hits a record high.
Copy link
Copy link
Subscribe to gift this article
Gift 5 articles to anyone you choose each month when you subscribe.
Already a subscriber?
Like many aspiring Australian home buyers, Anna Douderina had long dreamed of owning a house but bought an apartment instead.
“I really wanted a house, but we can’t afford anything around Sydney, so we decided to buy a unit. It’s the only option for us at this point because house prices are way too high,” she says.
“We’re using this property as a stepping stone towards our dream home, so hopefully, it will increase in value in the next few years so we can build some equity and sell it.”
But the reality of the housing market today is that a lot more people will live in apartments and for a lot longer, as houses become increasingly unaffordable. While apartment living is suitable for some, for those who see apartments as a stepping stone to owning a house, the numbers suggest that accepted wisdom is misguided.
Sydney first-homebuyer Anna Douderina says buying a unit now is a better option than continuing to rent. Peter Rae
Over the past 10 years, Australian house prices rose 84.7 per cent while units prices gained 40.7 per cent. In Sydney, houses are up 104.3 per cent, with units up 47.4 per cent. It’s a similar picture in Melbourne, where house prices climbed by 80.4 per cent while units only gained 27.5 per cent, Corelogic data shows.
And the gap between houses and units hit a record 45.2 per cent nationwide in January. In Sydney, the premium of houses over units has ballooned to 68 per cent while it is 55 per cent in Melbourne.
A price gap that wide would normally be triggered by a sudden inflow of apartment supply, such as during the unit-building boom of 2012 to 2017, but this time it appears a lack of demand is behind the disparity.
“Even though we have an environment that should be pushing more demand towards the medium- to high-density sector – because it’s cheaper amid the affordability crisis – that doesn’t seem to be the case,” says Tim Lawless, Corelogic’s research director.
“It seems that Australians are not really wanting to live in a high-density environment just yet.”
In a country where supply of housing is trailing behind demand, the underwhelming performance of apartments illustrates the challenges of adequately housing a fast-growing population.
The apartments people want to live in are not available. Bigger, better apartments mean builders will have to build fewer in each development – a three-bed apartment will sell for less than two one-bedders. But with land and construction costs so high, and planning permissions so restrictive, that’s not easy.
A lack of suitable bigger apartments in the market is largely due to the legacy of the investor-led building boom during the 2010s, when developers raced to build smaller, rental-grade apartments, says Stuart Penklis, Mirvac’s chief executive of development – residential, commercial and mixed use.
“About 10 years ago, between 2013 and 2016, we saw a lot of demand from local investors and offshore buyers and developers responded by building smaller products.”
Apartments have also suffered from concerns about quality of construction. A survey conducted by the Building Commission NSW with Strata Community Association NSW found more than half (53 per cent) of all strata buildings had serious defects between 2016 and 2022. To rectify those defects, owner corporations are spending an estimated $79 million, which is then charged to owners.
“Many … high-rise apartments are not fit for purpose,” says veteran property developer and Thrive Construct executive chairman Barrie Harrop.
“They’re not actually designed for people to live in over the long term. The architecture is shocking and a lot of those buildings are falling apart.”
Margaret Lomas, founder of Destiny Financial Solutions, says apartments have had a bad run with many buildings requiring expensive repairs.
“Many potential property buyers fear owning an apartment in a complex which subsequently needs to raise a special levy to rectify these issues,” she says.
Apartments also come with running costs such as strata fees, which some investors say are deterrents to buying into the segment.
“A large chunk of your rental income goes into high body corporate fees and you’re not getting that back in terms of capital growth,” says Arjun Paliwal, head of research at buyer’s agency InvestorKit.
“Broadly speaking, units or apartments remain a money pit, although it depends on the individual property,”
Investor Chris Huxter said he had considered buying a unit. “But when I started factoring in the high body-corporate costs and the relative lack of long-term capital growth, I decided against it and bought houses in other states – where they’re cheaper.”
Huxter bought five houses with his partner, Catherine, in the past three years, and he estimates their values have grown by about 30 per cent.
Property investors Chris and Catherine Huxter decided to avoid investing in units due to lower capital gains. Dion Georgopoulos 
“Even if units are half the price of houses I wouldn’t buy them because they lack the scarcity factor that houses have. Units can be built relatively quickly en masse, which will reduce capital growth prospects,” he says.
For homebuyers who are opting for units as a way to get into the property ladder, upgrading to houses could be difficult, says Paliwal.
“Units are not catching up with the growth rate of houses, so they might be in the market, but there’s a huge opportunity cost because of the slower capital growth,” he says.
“There’s also high selling and buying costs such as stamp duty when they upgrade, so they could potentially be left with very little gain, so it might be better for them to save for a house.”
But saving for a house deposit, even for the cheapest home in Sydney’s outer fringe, would take nearly seven years. For many aspiring homeowners who want to escape a tight rental market, buying a cheaper unit is an appealing and logical option.
“We just feel like there’s really no choice. It’s either you rent, and then you’re just thrown around at the mercy of your landlord, or you buy your own place,” Douderina says.
“Rental prices just keep going up, so you feel like you’re getting squeezed from all sides. So we thought that it was probably in our best interests to just get our own place, and a unit made more sense.”
Amanda Gould, buyer’s agent with HighSpec Properties, says first-home buyers’ often limited budgets make units one of the most viable options for breaking into the housing market sooner. “Most first-homebuyers can afford around $600,000 to $850,000 depending on their income, which obviously limits where and what they can buy,” she says.
Apartments may eventually find more favour with buyers and investors. Richard Temlett, national executive director at Charter Keck Cramer, says the apartment sector has started to mature compared to a decade ago.
“Most apartments built 10 years ago were sold to investors who then rented it to university students who didn’t care much about the size or design, so they were simply investment commodities” he says.
“Now, both the buyer and renters segment of the market wants more in an apartment, so developers have had to respond and then deliver stock that is more appropriate to their needs.”
Penklis says Mirvac will still allocate a portion of smaller apartments for first-home buyers, but a larger chunk of the new builds will be larger products to cater for owner-occupiers.
“We’re already building a higher number of large apartments such as the Nine by Mirvac in Artarmon and The Frederick in Green Square, which have much higher proportions of three-bedroom and even four-bedroom homes,” he says.
“Looking at the workbooks that we’re delivering, there will be a shift towards these larger apartments.”
Data from consultancy Charter Keck Cramer shows the size of apartments has increased since 2016 as developers respond to owner-occupier demand.
The size of a one-bedroom apartment built since 2020 has increased to 53 square metres, up from 48 square metres for those built between 2010 and 2016.
A two-bedroom apartment with one carport increased to 70 square metres from 64 square metres, while a three-bedroom apartment widened to 137 square metres from 125 square metres.
However, supplying the market with the right product that is affordable for many home buyers will take time, says Penklis.
“Construction costs have been rising significantly over the last few years and that has made it difficult for many developers to make projects financially viable,” he says.
Luke Berry, co-founder of developer Third.i, says the high cost of land makes it tougher to build bigger apartments that stack up and are still affordable.
“We estimate that our overall costs increased by 45 per cent in the last 12 to 18 months, so if you’re budgeting to build a $100 million apartment building, you’re now spending $135 to $150 million to make that thing work. That’s $50 million that needs to be passed on to the consumer, which makes it too expensive quite often,” he says.
“So your project doesn’t work and that’s why we’re seeing a lot of projects stall or be shelved at the moment – because we can’t actually build the projects for the right amount of money when you combine it with all the land costs and the cost of construction.
“This means the volume of apartments needed won’t be created in this cycle.”
Hazel Easthope, University of NSW professor and deputy director of City Futures Research Centre Arts, Design & Architecture, says there isn’t a single solution for the unit sector, but an important first step is to shift the focus towards apartments as long-term homes.
“We need to look at apartments as more than just investment or a stepping stone to a house,” she says.
“Once we’ve agreed that apartments can be good long-term homes, then it becomes a lot easier to talk about what the practical steps are needed to realise that.”
Those steps could include improving regulations around design and building quality for new buildings, and around maintenance and quality for existing homes, Easthope says.
Copy link
Copy link
Subscribe to gift this article
Gift 5 articles to anyone you choose each month when you subscribe.
Already a subscriber?
Follow the topics, people and companies that matter to you.
Fetching latest articles
The Daily Habit of Successful People