Is the value of a property is held in its land ownership?
This is not a simple question, as stand-alone homes will not always experience stronger capital growth than apartments as there are a few factors other than the amount of land to consider. This was once a ‘rule of thumb’ for investing, but as Real estate trends are constantly evolving, let’s see how this theory stacks up in today’s marketplace.
Where it all began…
The belief that land holds a property’s value lies in the basic premise that land appreciates, while buildings depreciate. With that reasoning, a stand-alone home has the potential for more growth as it holds 100 percent of land ownership and an apartment only owns a percentage of the land on which it sits.
When you factor in budget, location, and desirability, the idea that a stand-alone home is always a better investment needs a bit more consideration.
The population squeeze
In the past, when inner-city land was more available, it may have been fair to say that the percentage of land ownership was the most important consideration when investing in property. These days, Australia is experiencing rapid growth – and that affects the way we live.
Most growth is happening in our capital cities. Today, almost two-thirds of the Australian population, or 15 million people, live in our major cities, – and this trend is expected to continue. The population in Brisbane, for example, is expected to more than double by 2056.
Across Australia, the growing urban masses are increasingly fighting for property near city centres. Here people can enjoy cultural and entertainment precincts, shopping, facilities and plenty of opportunities for work, all backed up by solid infrastructure such as public transport. With limited land available, the only option is to build up, meaning medium- and high-density living is rapidly becoming the norm.
The property market is quite literally much tighter the closer you get to any of Australia’s CBDs – evidence that the location is a key consideration in supply and demand.
It comes back to supply & demand
Due to the population squeeze and the desirability of central living, the land that inner-city apartments occupy has become increasingly valuable. In many cases, this makes up for the smaller percentage of land ownership.
With this in mind, we propose that a property’s potential for capital growth lies in demand, not the land. In other words, lifestyle is a key influencing factor.
The budget factor
Another influence shaping the property market is affordability. Most stand-alone homes close to the CBD are now priced at well over $1 million, making these properties unreachable for many of us. Meanwhile, buyers can achieve the same lifestyle in the same desirable location for much less by purchasing an apartment or townhome. Depending on the location, an inner-city apartment or townhome may be up to half the cost of a stand-alone home.
Lower entry-level pricing for medium- to high-density properties in inner-city locations drives this market’s appeal and makes it more accessible to a wider demographic. This assists with resale too, an important consideration for every property purchase.
With this in mind, saving for a deposit for an apartment is generally much more achievable, leading to property ownership in the same location sooner. In a rising market, this may be a consideration in the decision-making process.
With the potential to change the dynamics of the property market, Generation Y is showing a strong preference for inner-city living. In most cases, this can only be achieved with more affordable housing such as apartments and townhomes. Location, lifestyle, and affordability are the major considerations for this demographic, which makes up 26 percent of the adult population.
So it seems the great Australian dream of owning that acre of land is diminishing. In many European countries, such as Germany, it is quite typical to live in an apartment for your whole life.
In Australia, the result of this change is an emphasis on parks and useable recreational areas becoming more common in inner-city master-planned communities to cater for the families that will be living there in the future.
All you really need to know
As we’ve discussed, shifts in the market have seen a greater focus on location and lifestyle. The term ‘urban village’ seems to be popping up everywhere and developers are embracing the philosophies behind this movement.
From a capital appreciation perspective, it is important to understand that houses do not necessarily experience stronger capital growth than apartments. No matter what type of property you are looking for, it is important to consider all aspects to minimise your risks. Which Property takes a 5-star approach when we assess a property’s potential, which you can read more about here.
Balancing financial goals & lifestyle
Whether purchasing as an investment or somewhere to live, it’s wise to step back and take a holistic approach to your final decision; that means taking into consideration capital growth potential, rental returns – now or in the future, and your ultimate financial goals and lifestyle. A key consideration should be the type of purchaser you are. If you are time-poor, perhaps you would be more suited to a low-maintenance apartment or townhome, for example.
A brave new world
When choosing a property, it is essential to weigh up all the considerations rather than rely on generalisations. The adage that the value of a property is held in its percentage of land ownership is a little outdated. While inner-city apartments may not hold such a large portion of land ownership, the location’s desirability will drive demand and therefore prices in today’s market.
At Which Property we specialise in tailored property solutions for investors and owner-occupiers alike. We can help you understand your goals and find property solutions suited to you.
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