The big property question: apartment or house?

Price is always a function of supply and demand. It is easy for the apartment market to be oversupplied as developers bring on hundreds of apartments at once and it is extremely difficult to stop construction halfway through the project. In comparison, for houses, it is possible to construct only one house and somewhat easier to stop supply.

Generally, a project home builder constructs one or two display homes and once contracts are signed, they begin to construct others. If they do not have contracts signed, they will not build; as a result there is a stoppage to supply.

For the apartment developer it is very different, as if they wish to construct an apartment block containing 300 apartments, for instance, banks would require them to at least sell 70 per cent of the plan. Whilst that is 210 apartments dealt with, the apartment developer would have to hope that the remaining 90 apartments would be sold before the completion of construction. With so many available apartments up for sale at one time it’s easy to flood the market and cause prices to fall.

It’s fairly common to re-sell apartments at lower prices than they were originally purchased for. One of the reasons for this is the number of apartments that are being sold at one time (supply); another is the land to asset ratio.

This assumes that the value of land appreciates at 10% per annum, whilst the value of buildings depreciates at 1.5% per annum. If properties double every seven to ten years, this means an increase in property value of between 7 and 10 per cent each year. Then, if building values depreciate and land values appreciate over time, these two forces are working against each other to give an overall increase in value of between 7 and 10 per cent annually.

If you are looking to enter the property market or have a question about home loans, contact SuperRate.