Houses now more popular than units with property investors, research finds

Houses have become more popular with Australian property investors than units, new research shows, a trend that could become more prominent post-COVID-19. 

New properties have also become the investment of choice, the 1000 Assets Study by MCG Quantity Surveyors shows. The study assessed investment properties the company had prepared depreciation schedules for, purchased between January 2016 and December 2019. A thousand properties from each of the four years were included in the study.

Nearly half of the 1000 investment properties purchased between April and December 2019 included in the study were newly built, compared with 23.9 per cent in 2016-17.

“That minimised the tax deductions available in depreciation for the average investor, but what has happened is we’ve seen deductions go up,” MCG Quantity Surveyors managing director Mike Mortlock said. 

“It’s made it much more attractive for people to be buying or building a brand new investment property – it’s changed the way investors have behaved.” 

The study showed houses were the most popular property investment in 2019, at 37.5 per cent, while 33.7 per cent of purchases were units. In 2016-17, units were more popular at 47.2 per cent, with houses making up 43.2 per cent of purchases. 

The remaining percentage was mostly townhouses and a small number of granny flats and duplexes, Mr Mortlock said. 

He said there was a near 116 per cent increase in the number of townhouses purchased over the four-year period, while unit purchases decreased by 28.6 per cent. 

“While we’re seeing the percentage of people buying new properties increasing, we’re seeing that that’s coming more from the lower density than the higher density,” he said. 

Construction and flammable cladding issues seen in some buildings in Sydney and Melbourne could explain why some had started to move away from units as investment properties, he said, but also a lack of foreign buyers and renters could mean less demand for units. 

He said many people were likely to continue to work from home once coronavirus restrictions were lifted, making inner-city units less appealing to renters and investors. 

“I would expect post-COVID that we’re still going to see a similar thing – the boutique developments have a little bit of a larger floor plan, they’re a little bit more quality, they’re going to be more in demand,” he said. “I think investors are going to be chasing cash flow rather than looking at these lower yielding units.”

Domain economist Trent Wiltshire said investor activity would likely slow due to the pandemic because rental prices were likely to fall and vacancies were set to rise. 

“Population growth is going to fall significantly in 2020 and may be sluggish for a couple of years, so property developers will also be cautious,” Mr Wiltshire said. 

The study found that more than one quarter of investors lived in their properties before renting them out, a figure Mr Mortlock found surprising. 

“If you had asked me before, I would have guessed that maybe 10 per cent of people lived in their property before they rent it out,” he said. 

The amount of time they lived in their properties was also unexpected – more than four years on average, meaning it was not just first-home buyers looking to take advantage of grants and stamp duty concessions. 

“It’s a lot longer than you would need to qualify for a first-home buyer grant,” Mr Mortlock said. “There would be people who we would term ‘accidental investors’ so perhaps they live in their property and they want to upgrade or move somewhere else, but they realise they don’t really need to sell to move to their next property.”

The amount spent on renovations to investment properties also rose in 2019 by nearly 63 per cent to more than $35,500 on average across Australia. 

Mr Mortlock said this was also likely due to the potential for increased depreciation claims on newly renovated properties, but also that people living in their investment properties prior to renting them out were more likely to spend more on renovations. 

“Owner-occupiers spent 71 per cent more on their post-purchase renovations/improvements than pure investors,” he said. 

He said while tax deductions had gone up over the four years, landlords were still missing out on $2.9 billion in deductions by failing to obtain a depreciation schedule.