Slots are running out. Book your FREE 15 minute discovery call with an expert.

Which is a Better Investment: An Apartment in Sydney or a House in the Regions?

Image for the article - Which is a Better Investment: An Apartment in Sydney or a House in the Regions?
Which is a Better Investment: An Apartment in Sydney or a House in the Regions?

Sydney’s apartments are in the same price range as regional houses, if not higher.

The fact has triggered a question for investors: Would you prefer investing in an apartment in Sydney or a house in regional areas for the same price?

Today let’s dive into data and do some calculations to get a better picture.

3 Properties

In 2016, Sydney’s housing market had been on fire for almost four years. Market trends indicated that the market would keep surging for at least another year. No one would like to miss the property boom.

Let’s assume that we had a budget of $500k to buy an investment property that year. We went to the market and found that the budget could only afford a small apartment in Sydney.

We could proceed and buy an apartment, for example the one below:

Property A – 5/24-28 College CrescentHornsby, NSW, 2077 – $455,000 (May 2016)

1-bed, 1-bath, 1-car

Weekly rent: $380 (Gross yield = 4.34%)

Image of 62a91e47af1bba28d9401f0f 1.%20Property%20A%20photos

Or we could put in a bit more and get a brand-new apartment, like this:

Property B – 38/14 Pound Road Hornsby, NSW, 2077 – $479,000 (contracted in 2014, settled in Mar 2016)

1-bed, 1-bath, 1-car

Weekly rent: $450 (Gross yield = 4.89%)

Image of 62a91e7ae0946265f7732056 2.%20Property%20B%20photos

Alternatively, if we were willing to look beyond borders, we could get a house in regional NSW, such as Port Macquarie on the North Coast:

Property C – 21 Amira Drive PortMacquarie, NSW, 2444 – $450,000 (Sep 2016)

4-bed, 2-bath, 2-car

Weekly rent: $450 (Gross yield = 5.20%)

Image of 62a91ec6698e3be5153c4f09 3.%20Property%20C%20photos

These properties were all resold in 2022. Let’s see how much they are worth now, and how much they are leased for.

Image of 62a91eeec3ef64a4a288b0aa 4.%20Table%20 %203%20properties%27%206y%20growth
*2022 rental prices are not available for the properties. Figures are based on rental prices of similar properties in similar addresses. Source: CoreLogic

From a capital growth and rental growth point of view, Property C, the regional house, has performed way better than the 2 Hornsby apartments.

Then how about cash flow? As we know, the outgoings holding a house is higher than holding an apartment. Maybe we have saved money holding the apartments?

To find out, let’s do some calculation.

Key Assumptions

For the calculation, we make the below assumptions based on each region’s current regulations and market data.

Image of 62a91f3ddbd4dd0f9e844871 5.%20Table%20 %20Key%20Assumptions

Cash Flow Calculations

Property A

Image of 62a92036d9482b567e722b4d 6.%20Property%20A%20Cashflow

Property B

Image of 62a9204b87b8bc3a37c52531 7.%20Property%20B%20Cashflow

Property C

Image of 62a92067f2205dac1e516aa6 8.%20Property%20C%20Cashflow

Indeed, the annual holding costs of the house (Property C) were higher than the apartments (A&B). However, the house’s overall cash flow was the best – We took the least amount of cash out of our own pocket in holding it.

 

Why did People Rush to Sydney Apartments?

Clearly, regional houses would be a better investment option than Sydney apartments. Then, why did people rush to buy Sydney apartments?

Outside of culprits like backyard only investing and buying what is shiny/looks and feels good. Affordability and FOMO(fear of missing out) were some of the biggest reasons.

Sydney’s housing price surged dramatically since 2011, growing much more than the other major cities. The market was so hot that the annual number of house building approvals more than doubled in 6years, and the number of attached dwellings tripled.

Image of 62a920bd045b75783abb5043 9.%204%20Capital%20Cities%20Price%20Growth
Image of 62a920d2a0154119a093e877 10.%20Greater%20Sydney%20Building%20Approval%20%26%20Price%20Trends

In 2015/16, more and more people became FOMO buyers. They rushed into the market, realising that they couldn’t afford freestanding houses anymore, so they had to turn to apartments, especially new apartments.

It was not a difficult decision to make – many would think it’s a good idea, because apartments were more affordable and were not growing much slower than houses at that time. Besides, the new apartments enjoyed better yields, surrounded by amenities (eg. train stations, shopping centres, etc.), serviced by professional building managers and strata team, looked nice and shiny, and most importantly, there were so many available that the developers were offering big discounts!

Sydney apartments did look like a great deal at that time, but what happened that led to the weak growth of apartment in the following years?

Oversupply.

House market pressure is easily pushed high when demand increases because the supply is limited. However, the large number of new apartment developments has created too much supply even compared to growing demand, both in the sales and rental market. It’s not just an issue for the past decade. Looking into the future, the increase in apartment supply is likely to be much higher than houses due to the lack of available land in many areas of Sydney.

 

What if the FOMO Buyers Made a Different Decision?

Imagine some of those FOMO buyers didn’t end up with a Sydney apartment but a house in regional Australia, what would they have achieved? Let’s check some data. We use Hornsby and Parramatta apartments as Sydney apartment representatives.

Image of 62a9216bf2205d0a185216c9 11.%20Table%20 %20Syd%20apartment%20vs%20Regional%20house

Many Still Have Concerns…

Although the above numbers show clearly that a regional house would give you better returns, many investors still have concerns, the biggest being the local economy and rental demand.

Many investors believe that Sydney, as Australia’s biggest city, enjoys a large population and strong economy, thus higher rental demand and rental growth potential. On the contrary, many regional towns only have 5-digit populations, and seem to have no impressive economies.

Well, is that so or is it just an illusion?

Let’s dive into data and check how populations, unemployment rates, and rental market vacancy rates have been for Hornsby and Port Macquarie in the past decade.

·     Population growth

Image of 62a9229f5e2c39158f2e5077 12.%20Population%20Trends

·     Unemployment rate – The primary economic indicator

Image of 62a922cea8449ac14d5b5b7e 13.%20Unemployment%20Rates

·     Rental market vacancy rate & rental growth

Image of 62a922f2d2572a21fa9e3e4c 14.%20Vacancy%20Rates%20%26%20Weekly%20Rents

With higher population growth, lower unemployment rate, lower vacancy rate, and higher rental growth, Port Macquarie seems to be a strong economy, with higher rental demand than Hornsby.

 

Data and calculations show that a regional house could generate much more returns for you than a Sydney apartment with the same budget. The same applies to other metro city apartments, as apartments are prone to oversupply. However, not every regional house necessarily beats the metro city apartments. Thorough market research is crucial to make sure that the regional city or other capital cities you are investing in enjoys thriving economic activity and high market pressure. Don’t fall into the trap of backyard or comfort/feel good based investing.

 

InvestorKit buyer’s agents believe in the potential of houses in Australia and looking at Australia as a whole to generate our clients consistent market outperformance and have helped countless of our clients invest in over 21 cities across Australia to get greater returns than putting their money in big city apartments. In turn, achieving their investment goals faster than they had ever expected. Want to write your own success story of fast tracking your investment journey? Speak to us today by booking in your 45-minFREE no-obligation consultation!

Share this

Get ready to find high growth,
high yield properties.

To ensure high quality standards, and our ultimate goal, which is to help our clients build high performing property portfolios, we work with a limited number of customers a time. Spots are limited, take action, claim your FREE discovery call now.