Affordability Squeeze Rewrites Apartment v House Rule

Warning signs are flashing that property prices are on the precipice of a downturn . Meanwhile, state and federal governments are pushing for densification as a solution to the housing crisis. While there’s significant disagreement on what kind of property market will emerge on the other side, economists and analysts are suggesting that apartments may outperform houses in the near term, despite efforts to increase supply. Urbis partner Paul Riga tells The Urban Developer that both sides of the property sector are in “a holding pattern” until clarity emerges over whether apartments are affordable homes or growth investments. “It’s real life, it’s dynamic, and things are shifting. There’s broader impacts and changes that are coming at us on a daily basis,” Riga says. Urbis data shows that in the first quarter, local investors increased to 28 per cent of buyers, the highest since 2017. Owner-occupiers led at 52 per cent, while prices were stable at $17,165 per sq metre. Delivery of about 23,000 apartments per year is expected over the next two years, off the peak and reflecting a constrained market , according to Urbis. “I think it’s reasonable to say that, ultimately, affordability challenges cannot be attributed solely to apartment supply shortages,” Riga says. “The key theme is supply does still matter, but ultimately demand-side settings such as availability of credit, investor incentives, tax treatment and other factors can materially impact affordability as well.” ▲ Apartment builds will hover around 23,000 per year for the near-term, Urbis says. Domain chief economist Nicola Powell tells The Urban Developer that cyclical shifts in monetary policy and structural shifts in tax treatment have made the property market more complex. “Over time, houses tend to find greater rates of capital growth and ultimately it’s the land component that drives not only that higher price, but that better performance,” Powell says. However, the “affordability dynamic” has now entered into play as well. “That’s not only borrowing capacities, but also the serviceability of a mortgage and I think this is where we’re expecting units to outperform houses,” he says. Powell’s FY2027 Forecast Report is predicting unit price changes of -0.7 per cent to 3.3 per cent over the combined capitals, ahead of detached houses on -2.5 per cent to 1.5 per cent. That’s despite policy in support of apartment supply. ▲ Domain is forecasting apartment prices to outperform houses as markets soften. “[Apartment construction] is just going to be the hallmark of the next decade, where we are going to see more and more policy changes that help promote increased density,” Powell says. The existing price gap between property types will decrease, but not be erased. The land component will always remain a factor for the differential, although Canberra—with strong supply of both land and units—is an example of a market where relative difference won’t change too much in the near-term. “Sydney is the one that really stands out, where you’ve got this house-to-unit price premium which is at a record 111 per cent,” Powell says. “That’s unsustainable under current affordability pressures and I think it will pull unit demand or performance higher relative to houses, just because of that vast gap.” Product, buyer mixes shifting According to Riga, “savvy developers” are creating “tradable products” rather than “forever homes”, as investor attention shifts to new-build apartments. With the rent component and other revenue becoming more important in feasibility or valuation, build-to-rent may become more attractive . Urbis research has found the build-to-rent pipeline sat at 66,745 units in the first quarter, but only 35 per cent were funded. “There is still that broader policy support for for density and for development…but that still means that there’s still going to be a need for the developer to respond to that,” Riga says. “There is going to be more of a focus around effectively knowing your market, knowing who the purchaser is, knowing the drivers of your particular location. “It’ll be a very interesting six months to see how that continues.” ▲ Product differentiation is likely to increase as trading conditions evolve. University of New South Wales professor Chyi Lin Lee is co-author of a study titled The role of price spillovers in the Australian housing crisis: A two-market analysis that looks at apartments and affordability. Lee tells The Urban Developer his research shows a “spillover effect” from house prices to apartment prices, but not in the other direction. Increasing apartment supply, therefore, will not necessarily make houses more affordable. Conversely, if house prices continue to grow, apartments will also remain unaffordable. “We need to build more. There’s no doubt of it…but what we’re trying to say here is, if you try to build more, that might not necessarily address everything,” Lee says. ▲ Increasing supply of apartments alone is unlikely to improve affordability, Lee says. The house sub-market has begun diverging from unit prices since the Covid pandemic began (and money supply was loosened). While the asset fundamentals support the direction of price movements, money supply and other investor factors have influenced the quantum of growth in prices. Among other conclusions, Lee’s paper suggests that co-ordinated demand-side policy reform will be essential to improving affordability. “Housing [in Australia] is really still dominated by dad-and-mum investors…It would be nice to have more institutional investment in the housing sectors, like build-to-rent,” Lee says. “We need a more holistic approach. I think more thinking should be done on how that kind of holistic approach or framework can be developed.” Lee won’t speculate on where that policy discussion will lead, or how market dynamics will play out in the wake of a changing interest rate and tax landscape. “Unfortunately, I don’t have a crystal ball at the moment,” he says.

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Patrick Lau
Wed 08 Jul 26

Affordability Squeeze Rewrites Apartment v House Rule

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