Apartments vs Houses
As technology advances and society adapts there are more different types of property. Just 10 years ago many first home buyers and young families would not consider an apartment as a first home. With rising prices and young adults preferring to live in apartments compared to a standalone home, apartments have risen in popularity. The differences between the two can be the deciding factor for budding investors and first home buyers. Of course, the most obvious differences are the space, lack of a traditional backyard, the closeness to your neighbours, BD, etc. Financially, both have benefits and detriments depending on your situation. With increases to the demand of apartments both investors and first home buyers should have a clear understanding of the financial aspect.
Firstly, the price of the property is the main factor that concerns all buyers. According to Trademe’s (2017) Sale Price Index from their March report, the average asking price for apartments in New Zealand was $595,050 and for all property types it was $634,500. In Auckland, the average asking price for apartments was $631,450 whilst for all property types it was $918,600. Off the bat apartments are attractive because of the lower asking price. For a first home buyer trying to enter the property market, an apartment would be a great first step as it will require a smaller deposit when compared to a standalone home. The same benefit can be exploited by investors.
Property rentals are an investment for today, tomorrow and the future. As a first home buyer, the first property you purchase should become your first rental property. After having lived in your owner-occupied first home your equity would have increased. It is at this point your financial adviser will give you the nod to purchase your next home. Most of our clients upgrade to a bigger property as they have a bigger family, an increased income to afford an increased home loan and their equity would allow them to borrow within the LVR restrictions. Hence, they can own both properties and convert their first property into a rental. Apartment rents have a greater increase compared to standalone homes. According to Trademe’s (2017) March report on the Rent Price Index, the median weekly rent for apartments throughout Auckland was $450, which is an increase of 4.7% when compared to March 2016. This increase is higher than the rent increases for 1-2, 3-4 and 5+ bedroom homes for the same comparison. Based on this, if you want to receive a higher rent amount it would pay to purchase an apartment. For investors who are nearing retirement a higher rent received is beneficial as it will be part of your disposable income.
Growth in value
The most important aspect of investing in property is growing the value of the asset. Increased prices around New Zealand has resulted in a higher growth rate. Growth in value will increase the overall equity of an owner. This will allow them to increase their lending to purchase another property or renovate. The growth rate of standalone homes is greater than apartments due to the land under the house. Land is the deciding factor for those wanting to increase their equity quicker. It also gives an owner options; i.e. subdivide and build another property or demolish and rebuild. These options allow an owner to either increase their rental income or make a profit after selling the property. Apartments, as of today, do not increase as fast as homes. There is no land entitled to the owner on which they can subdivide or demolish and rebuild. Hence, the value of an apartment will only gradually increase as the demand increases.
To summarise, the price of an apartment is much lower than the price of a standalone home in most parts of New Zealand. It is a good option for first home buyers to get their foot on the property ladder. For retiring investors, it is a great source of income as the rate of rent increase is greater compared to standalone homes. However, for those wanting to increase their equity and gradually build their investment portfolio standalone homes are the answer. The growth rate of this type of property allows an owner to increase their lending and purchase a new property.
TradeMe (Ed.). (2017, April). Three years that have transformed the Auckland property market. Retrieved May 10, 2017, from http://www.trademe.co.nz/property/price-index/for-...
TradeMe (Ed.). (2017, April). Regional rents up by $3,000 annually in just three years. Retrieved May 10, 2017, from http://www.trademe.co.nz/property/price-index/for-...