When selecting an investment property, it is important to choose something that has appeal to tenants in the current market, and would also be attractive to other investors or owner-occupiers if the property needed to be sold in the short term. However, increasingly, property investors are realising the benefits of holding on to their investment properties for the long term, perhaps 20 years or even more.
The question then becomes ‘How do I ensure that the long-term investment value of my asset is underpinned?’ A brief understanding of the role that demographics plays in housing demand should ensure that you do not buy a property that may face a drop in demand in the future.
In the past few decades, lifestyles have changed significantly. Forty years ago most couples in their 20s would be married with children. My parents were married in their late teens and had three children in less than five years. That was typical in those days. If you were in your late 20s and living on your own, you would have been regarded as something of an oddity. Nowadays, the reverse is true. People are getting married later, or not getting married at all. They are having children later or not at all. Household size is gradually diminishing. One hundred years ago there were around 4.5 people per household. Currently, this figure stands at around 2.5 per household and is still trending downwards. In 2011, 40% of households in the City of Sydney contained only one person. So how can we use this demographic information when making property investment decisions?
Know your target market
The requirements of today’s premium tenant reflect these demographic trends. In the past, apartment living was very much a default option for those unable to afford to buy or rent a house. Nowadays, with smaller households who are time poor and who put a high value on convenience and lifestyle, medium density living is an attractive option in its own right. I am a good example of someone who can afford to live in a house but chooses to live in a two-bedroom apartment within close walking distance of all the conveniences like cafés, shopping and work.
Choosing the right location
There are those investors who have a strong bias towards freestanding houses. The prevailing argument is ‘land appreciates, buildings depreciate’. So the assumption is that the higher the land content, the better the potential for capital growth. There is also an assumption that costs are going to be lower because there are no body corporate fees to pay. These assumptions can be misleading and are certainly not my experience. In inner city locations, there is naturally a high demand for one- and two-bedroom apartments. Moving a little further out where land is more affordable, townhouses become a more prevalent dwelling type. Moving out a little further again into natural growth corridors, new subdivisions can supply the market with house and land options. All these dwelling types can be good options for investors provided that good infrastructure is present and demand is strong.
A well-balanced, low risk portfolio should be geographically diverse and ideally include a diverse range of housing options that are appropriate to the location and target tenant. Changing household demographics can mean that some properties and some locations may get less desirable over time, so it is important to ‘future-proof’ your investments as much as possible by projecting into the future and predicting how a particular property or area might perform long term.
Future performance may depend on how well your property can adapt to changing household demographics. For example, some investors have an aversion to one-bedroom units. However, given the fact that some time in the future, given current trends, half of all city dwellers could be living alone, and affordability is becoming more of an issue over time, it makes perfect sense that the demand for good, spacious one-bedroom apartments should increase. I own four one-bedroom apartments (two settled, two completing next year) and they have performed very well over the years (one purchased in 2003, one in 2008). I have never had any problems getting high rents or tenants.
Despite these demographic changes, I believe there will always be a demand for well-located freestanding houses. However, focusing only on this dwelling type to the detriment of other options that may be even more in demand in the future could prove to be a little short-sighted.