Quick Bite –When should you buy your first apartment or house?

Being one of the few members of my extended family in the financial field (most of the others are in science or medicine), I’m often the one who gets asked for financial advice. How should I allocate my super contributions? Should I convert some USD into AUD? Is it a good time to buy gold shares? But the question I’ve been asked most of late is from younger relatives – nephews, nieces, young cousins – who are in their late 20s or early 30s and who are becoming settled in their careers and perhaps contemplating marriage – and it is, “Should I buy an apartment or house?”

What a difficult question! There is such an emotional element in owning one’s own home that sometimes the question answers itself. Having enough to put down a sizeable deposit, taking on a very material amount of debt in the form of a mortgage for the first time in one’s life, having confidence in one’s job security to facilitate those mortgage repayments, current property prices being what they are (especially here in Sydney). There are so many factors to think about…

Our Quick Bites are meant to be brief, so I’ll try be concise and list rather than discuss the considerations that I would keep front of mind in this piece, and I’ll refer to Sydney house prices because that is what I’m most familiar with. But note that house prices are very “parochial” and vary enormously based on many factors (e.g. access to infrastructure, good schools or parkland, proximity to job opportunities, beaches or coastline, harbour or city views, suburb status or reputation, etc). Plus, the fact that any capital gain on one’s primary residence is tax free (at least, for the moment) and that one can negatively gear investment property (again, with present legislation as is).

 

Source: AMP

 

How has residential property performed over time relative to other investment assets? Below see a long term chart from Owen Analytics comparing various asset classes over the last 24 years. It shows the median Sydney house price achieved growth of 6.8% per annum, behind ASX shares (including franking credits) of 9.8%pa and global shares (7.6%pa), but still a very respectable return.

 

Source: Owen Analytics

 

Yet over the last 10 years, residential property has outperformed Australian shares in 6 of those years. Statistics can be used in different ways to support alternative narratives!

 

Source: Australian Property Update

 

This chart below shows the proportion of Australian homes that are valued at $1m or more – now at a staggering 34% of the total.

 

Source: Cotality

 

Ultra-prestige house prices

The growth in very expensive real estate has been such that Westpac Private Bank recently introduced a chart series with Cotality (formerly CoreLogic) that shows the growth in homes over $5 million by Australian capital city.

 

Source: Westpac Private Bank, Cotality, AFR

 

This is not just an Australian phenomenon – it extends to most developed world economies, as indicated in the chart below from The Economist.

 

Source: The Economist

 

What advice to give to an aspiring young home-owner, particularly in Sydney?

Face the reality of Sydney’s market: greater Sydney’s property market remains the most expensive in Australia, with a median house price of $1.496m and a median unit price of $863k. This means you’re looking at saving substantially more than in other cities.

Set your savings target: For a traditional 20% deposit on a median house, you’d need around $300,000. However, eligible first-home buyers can buy a home with a deposit starting from 5% with no Lender’s Mortgage Insurance (LMI) through government schemes. This reduces the deposit target to around $75k for a median house, or $43k for a unit.

Take advantage of first-home buyer programs: The First Home Guarantee scheme allows you to purchase with just 5% deposit and avoids lender’s mortgage insurance. Some Sydney homes up to $900,000 qualify, and there are even schemes allowing deposits as low as 2%.

Create an aggressive savings plan: open a high-interest savings account or invest in a sharemarket fund and set up automatic transfers. Aim to save 25% of your income, and cut discretionary spending for the next few years.

The key is being realistic about time-frames while taking advantage of every government scheme available to first-time buyers.

Predictive Factors for House Prices

• Interest rates and monetary policy – The Reserve Bank’s cash rate directly impacts borrowing costs and affordability, making this the primary driver of short to medium-term price movements. (Conversely, lower interest rates tend to boost house prices.)
• Population growth and migration – population growth through both domestic and international migration creates underlying demand for housing and remains a fundamental long-term driver.
• Housing supply and construction activity – new dwelling approvals and completions directly affect supply-demand balance. The total number of dwelling units approved in NSW fell by a massive 18.8% in June 2024, highlighting supply constraints.

 

Approximately 177,000 new dwellings were completed in 2024, while the national housing target is to build 240,000 new homes per year. This indicates a significant shortfall in housing supply, with current building rates falling short of what’s needed to meet population growth and address the housing shortage. Government reassurances in the past have not amounted to much in practice.

 

Source: AMP

 

Predictive Factors for House Prices (cont.)

• Income growth and employment levels – real wage growth and unemployment rates determine purchasing power and debt serviceability for buyers.
• Government housing policy and taxation – policies affecting first home buyers, stamp duty, land tax, negative gearing, and capital gains tax significantly influence demand and investment activity.
• Credit availability and lending standards – bank lending criteria, deposit requirements, and regulatory changes from APRA affect who can access finance and at what cost.
• Rental market dynamics – increased rental demand at a time of very low vacancy rates will likely see rentals continue to rise, which affects investment demand and affordability pressures.
• Economic growth and business confidence – broader economic performance influences employment, income growth, and confidence in making major purchases.
• Infrastructure investment and urban planning – transport infrastructure, zoning changes, and urban development policies affect location desirability and supply potential.
• Global economic conditions and capital flows – international economic stability, exchange rates, and foreign investment regulations can influence both demand and financing conditions.

The interplay between these factors makes precise predictions virtually impossible, but understanding their relative importance helps in assessing likely future trends and risks.

What about investing in a share portfolio that is correlated to the residential property market for a period, and then switching to buy the property once your deposit is large enough?

According to my AI assistant, for a 25-year-old with $50,000 seeking to build wealth for a future house purchase, a broad ASX 200 index is the recommended strategy over property-specific stock concentration (e.g. REITs, property developers, discretionary retail, furniture and housing-related companies). Turns out that historically, a diversified fund or index approach offers superior risk-adjusted returns, diversification benefits, and lower transaction costs.

But the AI view might not be correct. A property-focused strategy offers benefits of:

• Thematic Alignment: direct exposure to property market drivers.
• Potential Outperformance: A-REITs returned 19.9% in FY24, outperforming ASX 200 by 12.1%.
• Defensive Income: REITs provide dividend yields of 5%+ typically.

Key drawbacks of the property-focused strategy:

• Higher Volatility: property stocks are more sensitive to interest rate changes.
• Concentration Risk: overexposure to single sector increases portfolio risk.
• Cyclical Performance: property developers particularly vulnerable to construction cycles.
• Higher Costs: active management and stock picking increase transaction costs.

Conclusion

No one really knows with certainty what the future holds – for residential property prices, share prices or anything else. Residential property in Australia has traditionally performed well – even after the impact of inflation – and for many reasons including population growth, restricted supply, the ready availability of mortgages to buy and tax concessions on sales, I would expect existing trends to continue. Full disclosure: for those reasons, I recently assisted one of my children with the purchase of their first unit.