June 15, 2022

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%)

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%)

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%)

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

*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.

Cash Flow Calculations

Property A

Property B

Property C

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.

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.

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

·     Unemployment rate – The primary economic indicator

·     Rental market vacancy rate & rental growth

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!

DISCLAIMER: Contents of this document are of general nature only and should not be relied upon solely when making an investment decision. InvestorKit nor any of its directors, associates, staff, or associated companies bear any liability from any action derived from the contents of this email. One should always seek third-party investment information from relevant parties such as legal, finance, and accountancy enquiries.

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