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The new Australian dream: own an apartment

The Australian Financial Review

The Australian Financial Review
By: Ben Hurley
16th June 2011

Apartments are on course to overtake houses as the most common new homes in Australia’s biggest cities as young buyers and renters forgo the traditional backyard for tight living spaces in the inner suburbs.

The apartment building pipeline is swelling. In the 1990s there were three houses approved for every one apartment, according to Bureau of Statistics figures analysed by Macroplan. In April this year there were only 1.6 houses for every apartment, the lowest level to date. Home building figures released yesterday show a continuing downturn in detached houses, and a 36 per cent increase in apartment and town house volumes over the past 12 months.

Property analysts say preferences are shifting away from the terrace house towards a home in an apartment block, helped along by rising prices in former working class inner-city suburbs. Greater care and creativity is going into apartment design. High-profile fashion designer Alex Perry plans to put his name to at least 10 new apartment buildings, and big-name developers such as Frasers
Property Australia are bringing in Coco Republic, Smart Design and Koichi Takada to do apartment fit-outs.

“When I started out as a renter, the expectation was you would rent a three-bedroom terrace in Carlton or Paddington or New Farm,” said – Justin Ganly, managing director of economics consultancy Deep End Services.

“Today that expectation has largely changed so that when you start out as a new professional renter, you will be taking a two- or three-bedroom apartment in South Bank, Pyrmont or in Kangaroo Point. That in my mind is the seismic shift that’s going on.”

Poor affordability and the lack of choice are driving factors, but they are not the only reason that people are choosing apartments over houses. Broader demographic shifts are at play.

There has been a steady decrease for decades in the number of people per dwelling. The most recent figures in the 2006 census showed there were 2.46 people per home, compared with 3.24 people 40 years ago. Singleperson households, one-parent families and couples without children were increasing, according to the census.

Urbis director Roberta Ryan points to other trends, such as the increased participation of women in the workforce and longer working hours.

“Houses require upkeep and most of us recall our parents spending at least a day on the weekend mowing the lawn and clearing out the gutters,” Ms Ryan said. “We have different lifestyle expectations now and most of it is external to the house. We eat out more, we have a more external social life.

“I imagine there will be a cohort of people in their late 20s or early 30s who, if they make the transition to home ownership, may never make the transition to owning a separate dwelling.”

Many believe Australian housing is overpriced, particularly houses in inner-city suburbs on large blocks of land.

Analysts say that if the country is able to fix its crippled planning and building regime, there is strong demand for apartments that are affordable.

Figures by RP Data-Rismark show the capital growth of units has outpaced houses for the past five years, as home buyers search for more affordable housing options. In the 12 months to April, unit values increased by 0.1 per cent while the value of houses fell by 2 per cent.

The biggest unit price gain was in Sydney where supply is tight due to a chronically ill building sector and a lack of new supply on the market. Prices in Sydney rose 2.9 per cent in the past 12 months.

In terms of volume, Melbourne and Canberra are booming. In Melbourne there were more than 20,000 high- and medium-rise apartments approved in the past two years. In Canberra there were more apartments approved last year than in Adelaide, a city four times its size.

The number of Sydney apartments being built has largely tracked sideways for the past two decades, with developers blaming long planning delays. Even so, only 41 per cent of homes approved in Sydney over the past three years were detached houses, according to Australian Bureau of Statistics figures compiled by consultancy Urbis. The rest were apartments and town houses.

There has been some sign of a turnaround in the nation’s largest city. After five years of little price growth, a boost in values over the past two years gave developers the confidence to proceed with new projects. Stamp duty exemptions for off-the-plan sales below $600,000 have boosted demand. Apartment approvals are trending up, although from low levels.

There is a widely held belief that if more construction-friendly planning laws are passed, Sydney’s pent-up demand could drive a building boom.

This demand is illustrated when new projects come to market. Listed developer Australand last week announced it had sold 102 out of 126 apartments off the plan at Linc, the next stage of its Discovery Point development at Sydney’s Wolli Creek. More than 80 per cent of the total sales were achieved within 24 hours of the release.

But there is still a long way to go before apartments become the choice of most Australians. In the 2006 census, 22.5 per cent of households were living in medium- or high-density housing. The apartment building phenomenon is mostly on the east coast, in the cities. Nationwide, 76 per cent of approvals in the past three years were for houses, and in Perth it was 80 per cent.

With some notable exceptions, apartment developers have yet to crack the owner-occupier market. They are mostly bought by investors and occupied by renters.

“The feedback in Sydney and Melbourne is demand is dominated by investors,” Macroplan economist Jason Anderson said.

“It’s not owner-occupier demand, it’s more people’s expectations in terms of rents, it’s more the numbers side of it than the aspirations of the owner-occupiers.”

That owner-occupier market is lucrative, according to proud apartment dweller Charles Tarbey, chairman of the Century 21 real estate franchise. Buildings dominated by home owners promise to show more capital growth and be more resilient in economic downturns.

“There’s a two-tiered market, two levels of values and that’s dependent on the owner-occupier aspect,” Mr Tarbey said.

“The closer you get to Chinatown and Pyrmont [in Sydney] you get a higher tenancy factor and that will hold their values back. People like to live in a building where they know their neighbours.”

He said better presentation and better concierge services tended to draw in a greater owner-occupier crowd. The rise of apartments will pressure local, state and federal governments to resolve a long list of higher-density governance problems. Apartment owners cannot access solar schemes like feed-in tariffs or solar panel installation rebates; nor do they get government-paid aerial upgrades as part of the shift to digital television.

They pay goods and services tax on water while house owners don’t. After the Brisbane floods, hundreds of flooddamaged apartment buildings were refused insurance payouts as well as government flood assistance payments handed to businesses and house owners.

There are also issues with owners winning compensation from developers that build apartments with defects, as well as the use of proxies by developers to exert disproportionate influence on the governance of individual – buildings.

As the up-and-coming apartment generation gets older, the question is what will the next phase of their Australian dream look like? Will they seek a house with a garden to raise their children, or will it become more acceptable to raise kids in an apartment. According to Mr Ganly, we are not there yet.

“The big question mark is are we going to adapt as people have in more densely populated countries like Singapore and Hong Kong and be able to live in apartments with children? I haven’t seen it yet but I think this is the next frontier.

“The upside to a developer who caters appropriately to this market is huge.”

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