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Houses are becoming less and less affordable. Just five years ago, more than half of Australia's SA3s had median house prices below $600,000. And today, that number has dropped to less than one in five. So, are townhouses becoming the next best option? And can they actually deliver competitive results?
Today, let's find out. In this episode, let's dive into data and find out. I'm Joan. Let's get into it. For decades, houses are always regarded as the best investment asset in property investment because of the highest capital growth for the long term among all asset groups.
But today, things are changing. Affordability is becoming more and more serious of an issue. Just five years ago, back in 2021, around 177 Australia SA3 regions, among 330 in total, were having a median house price of below $600,000. And that's more than half of them. Today, in 2026, the number has dropped to just 62 of them.
And that is less than one in five. And among these 62 regions, a lot of them are really remote and not really attractive to investors or homebuyers, and in general, not very stable or strong in the local economy. And on top of the price growth, interest rates are staying high. Borrowing capacity is quite limited today compared to years ago. So naturally, a lot of investors are becoming interested in townhouses, seeing townhouses as the second best option after houses.
So are townhouses worth considering now or worth investing in now? We try to find out from two angles. One, cash flow. Two, capital growth. So first, cash flow.
For cash flow, we are looking at the difference between townhouse markets and house markets. We selected 21 SA3 regions to do this study. You must be curious, why only 21 SA3s? How did we select these regions? The reason lies in availability of data.
For almost all data providers across Australia, there are only house market data and unit market data. There's no specific townhouse market data available. That is why we need to use either house market data or unit market data as a proxy when we do townhouse market analysis. In this case, as we are trying to compare townhouse yields with house yields, we need to use unit market data. And to make unit market data as accurate as possible, we selected the regions where townhouses represent more than 90% of the local unit dwellings.
That is how we narrowed down 330 SA3s to just 21 of them. Now the chart on the screen shows the median rental yield of the house market and unit market of each of these SA3s. As we can see, in most of these SA3s, units yield or townhouse yields are much higher than the house yields. But despite the outliers in Brisbane, one pattern is clear. Townhouses in general typically provide higher rental yields compared to houses.
If we go to realestate. com and search houses and townhouses for lease, it is quite common that we see two properties, one house, one townhouse, of similar conditions, similar number of bedrooms, and their rental prices would be very similar to each other. But if we check the sales prices or value of these two properties, the house's value tends to be much higher than the townhouse's, making the townhouse's rental return rate higher than the house's. So that's a more practical way to check whether townhouses are delivering better rental return rates than houses. And now when it comes to long-term capital growth potential, we actually did an empirical study with Melbourne as the study area.
What we did was that we collected around 300 townhouse samples that were sold at least twice over the past 20 years. And we compare the difference between the sales prices to get the value growth over the holding period. And then we compare that value growth amount with the median house price growth over the same period in the same suburb to examine how the townhouse's performance has tracked the local house market's average performance. And from there, we've got this plot chart. In this chart, the gray dots represent the difference in annualized capital growth between the townhouse samples and their local house markets.
We annualized the growth difference to make it easier to benchmark. There are two interesting things here. One is the convergence over time. The second is the level that performance difference stabilizes at towards the end. So first, the convergence trend.
When the holding period is relatively short, we see the performance between townhouses and townhouses outperform the local house markets by 6%, 8% per year. And sometimes they underperform the local house markets by 6%, 8%, or 10% per year. But as the holding period becomes longer and longer, the gray dots are gradually converging into a narrower and narrower range. And now if you look at the level all these gray dots converge, it is somewhere around minus 1%, meaning that in the long term, townhouses tend to deliver a 1% lower annual growth compared to their local house prices. With this chart, we're not saying that the longer you hold a townhouse, the more likely your townhouse is going to underperform the local house market by 1%, or the shorter you hold, the higher chance your townhouse would be performing better than the local house markets.
That's not what this chart is trying to tell you, because these dots are from very different townhouse samples. What we want to say with this is basically to show that in the long term, townhouses' capital growth potential is still slightly lower than their local house market. In the short term, performance could be affected by market cycles or short-term boom due to affordability, due to a large amount of incoming migration, or any economic or housing market shock that affects supply and demand. But over the long term, just like house markets, townhouse markets' performance tend to converge into a long-term capital growth range, and that range is typically still lower than houses. Now that we know that townhouses still tend to underperform house markets slightly, why should we still consider townhouses?
The answer is three things. One is accessibility. Now that houses are becoming less and less affordable, many investors who still believe in property investment cannot access the market right now with the current interest rate or borrowing capacity. In this case, buying a townhouse is becoming a strategic step. We know that compounding is the most powerful tool in any investment.
Time in the market usually beats timing the market. So getting into the market soon, even with a townhouse, can give you early exposure to the power of compounding. Two years later, when an investor who chose to wait and continue to save start to buy their first property, you might have already got plenty of equity from your townhouse investment and be able to buy your next property with interest rates come down and borrowing capacity get boosted. And second reason is cash flow. While in the long term, townhouse's capital growth potential may be lower than houses, so your rental income each year could be higher than potentially buying a house.
And that extra rental yield can make up for some of the capital growth loss. And third, which is more important, is the control we can have when it comes to individual properties. The data we were talking about, whether it's rental yield or capital growth potential, those were at an aggregate level that we cannot control. However, in general, one property we're going to buy, we can deliberately control for features of this property to make sure that we mitigate risks and we amplify advantages. For example, if I was to buy a townhouse today, I would choose an established area with a minimal oversupply risk, meaning minimal available or developable land that could have more townhouses or more houses to be built in the coming few years.
I would want to choose a townhouse with a relatively larger piece of land so that I can maximize the land component and make my townhouse resemble houses as much as possible. I would go for a relatively older townhouse rather than a new one because any new property, the first few years of holding, you experience the worst depreciation of the building and therefore capital growth would be less than it could have been if it's an established one. I would go for a complex with minimal high-maintenance facilities such as pools, lifts, barbecue areas, etc. to minimize my strata levy contribution or the possibility of having any high special levies. I would go for an area with a good mix of both investors and owner-occupiers to maximize my buyer pool when it comes to the time I want to sell this property.
And most importantly, I would make sure that I go to a market with diverse local industries, resilient job market, and sustainable housing demand, just as what I would do when I search for an investment house. And when all these features are controlled for, I can minimize my risks and maximize my total investment return. So in summary, as houses are becoming less and less affordable, townhouses are naturally becoming the next best option. While in the long term, capital growth potential may still be less than houses, it is still worth being considered because of its easier accessibility, its potentially better income, and when selected well, the competitive total investment return. So for investors who cannot afford a house now, a well-selected townhouse can be a good stepping stone in this current high-interest environment to move your portfolio building journey forward.
And just as houses, not every townhouse can make a good investment. We still need to do our market research and probably due diligence to minimize risks and maximize the probability of success. And that's it. I'm Junge, the Senior Research Analyst at InvestorKit. I'll see you next time.
