House prices boom, but apartments “risky” – should you still buy one?

Posted: 14 April 2021 12:43 pm
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Two-thirds of economists surveyed think apartments are "risky", but what does this really mean?

And if you're priced out of the housing market and a unit is all you can afford, should you still buy an apartment to get your foot on the property ladder – or avoid them at all costs in the current market?

First, the good news about property prices

A panel of 40 experts panelled by Finder in our April RBA survey confirmed predictions that the average property price across the country will increase 12% over the next two years.

But not all properties are created equal and houses are expected to enjoy the strongest growth.

The majority of surveyed experts agreed that units in Melbourne are a risky investment, while the same amount (68%) said the same about units in Brisbane.

Finder Head of Insights Graham Cooke said similar risks are present in Sydney.

But what are these risks, exactly, and do they mean first home buyers and other would-be home owners should shelve any plans of buying a unit?

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The biggest risks of buying an apartment in 2021

  • Oversupply. The biggest risk is that there will be too many apartments on the market, which removes price pressure and means values won't rise. The worst-case scenario is that unit values could even decrease, so your property is worth less than you paid for it.
  • Low demand. With fewer international students and a pandemic-led pause on immigration, there is less demand for apartment living. This could make it difficult to find a tenant for investors, and harder to sell the property.
  • Lack of land. The long-standing issue with apartments is that "you don't own any land – you own a square of air", Cooke says. Land tends to appreciate over time, unlike the actual dwellings on them (which depreciate). You also have limited opportunities to renovate and add-value.
  • Quality control. When you buy an apartment, you are part of a collective of owners in a building. Big issues could arise, such as the cladding crisis at Opal Tower a few years ago, which are costly and stressful to remedy.

How to reduce the risks of buying an apartment

Just because there are risks present, that doesn't mean you should necessarily avoid apartments altogether.

After all, there are some positive signs to take note of.

Property research group CoreLogic has crunched the numbers and calculated that although a lack of overseas migration and border closures are dragging the apartment market, conditions are "stabilising" and rents are beginning to increase again.

"Sydney unit rents have posted a subtle rise over the past three months, while unit rents in Melbourne have held firm over the same period," says CoreLogic Head of Research, Tim Lawless.

"The improvement comes after a long-running decline, however a material improvement in rental conditions is likely to be dependent on foreign students and visitors returning to [increase] inner city unit rental demand."

Apartment living room

Also, there are ways to mitigate the risks and buy an apartment that defies market trends and grows in value.

It begins with buying a property with the best possible growth prospects, as there's a very big difference between a good quality apartment and a riskier one.

An example of a good quality apartment is:

  • Well-made (not necessarily renovated, but good quality and spacious).
  • Minimum two bedrooms, as single-bedroom homes or studios have less demand and therefore lower growth prospects.
  • Has unique factor – it's different to other apartments in the complex because it has a better view, bigger balcony or more natural light.
  • In small complex (no more than 10 apartments).
  • Has the potential to add value through cosmetic renovations or a slight structural upgrade, for example, reconfiguring walls to cordon off a small home office.
  • Located in a sought-after suburb.

The key factor here is location, which includes both the suburb itself, and also the property's location within the suburb. Is it near amenities like shops, doctors and cafés? Is there public transport nearby? How close are you to lifestyle features like beaches and parks?

"Location is even more important than it is with houses, because of that lack of land," Graham Cooke says.

An example of an apartment with lower value growth prospects is:

  • In a bigger complex, where every unit is virtually identical – this is risky because it's hard to make your property stand out to potential renters or buyers.
  • Brand new, as you're paying a "new" premium and there's no opportunity to add value through renovations.
  • Located in an area with a family demographic, where the locals prefer houses with a backyard for kids and pets. Demand for apartments will be lower in these neighbourhoods, which puts a lid on price growth potential.
  • Located in an over-supplied suburb where there are multiple large apartment complexes flooding the market: think Mascot and Parramatta in Sydney, Docklands in Melbourne, and Brisbane's inner city.

All in all, despite the risks that there may not be a property price boom in apartment markets in the short term, it doesn't mean all apartments are risky in this market.

If you buy a good quality property and have a long-term view (meaning you don't plan to sell in the next 2-3 years), then you have the chance to get your foot on the property ladder.

In fact, if price growth remains slow and first home buyer demand drops off, there may be fewer potential buyers in the market, allowing you to negotiate the best deal on price.

Ready to make 2021 the year you become a homeowner? Get your budget in order, work out how much banks will lend you and learn how pre-approval can help make the process of buying a home easier.

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