Why buying an apartment might not be such a good idea

I spent a large part of my childhood in apartments. My first home was on the 25th floor of a building in Hong Kong. Since then I’ve been living in apartments all over the world. But when I wanted to buy a house in England I didn’t pay any attention to them. Apartments can be big and gorgeous or small and comfy — but in this country, at least, they’ve been far secondary to houses for years.

These days, with home prices soaring, some buyers — especially first-time buyers — might feel the need to rush and buy a home, or risk missing out forever. But the current boom does not affect all apartments equally: house prices are rising rapidly, but apartment prices are not. While lower price growth is welcome, the underperformance of apartments relative to houses highlights some serious issues. If you’re planning to swap into a home at some point, it might even be better not to buy a home at all and save and rent instead.

That’s quite a turning point. Between 1997 and 2007, apartments were the fastest growing property type in England, with an average growth of 13 per cent a year. Between 2007 and 2017—although overall growth was much slower—they were still the fastest-growing property type, averaging 3 percent per year.

Since 2017, that’s all gone out the window. Apartments are now the slowest growing property with an average increase of about 2 percent per year compared to single family homes which grew 6 percent per year.

Why is that happend? It’s tempting to blame the pandemic – with its space race and urban flight – but England’s housing market faced some serious challenges years ago.

The first issue was the introduction of the additional 3 percent stamp duty rate in April 2016. This prompted a surge in activity as investors and second home buyers rushed to meet the tax deadline. After this subsided, annual home sales returned to normal levels, but apartment sales declined. By December 2019, home sales were 21 percent lower than five years earlier – underscoring how important investors are to the housing market.

Then in 2017, London’s Grenfell Tower caught fire, killing 72 people and causing a building safety crisis. Many apartment owners discovered that they lived in houses that were considered unsafe; many more struggled to sell because mortgage lenders refused to lend on homes that didn’t have the proper fire rating.

Hopefully the end is in sight for the owners affected: new laws should offer more protection and limit the costs of renovation. But the market may have been irreversibly damaged. It has also brought more focus to tenants’ position in English law, highlighting the lack of control they have over building repair costs, utilities and ground rents. It seems that while an Englishman’s house may be his castle, an apartment definitely isn’t.

Line chart of home transactions by property type (Rebased Dec 2014=100) showing that home sales were already declining before the pandemic

Even before the Grenfell disaster, the popularity of new housing began to wane. Since the financial crisis, thanks to the UK government’s Help-to-Buy scheme and other planning measures, homebuilders have shifted the supply of apartments to larger greenfield houses.

The decline you see in Chart 3 is exaggerated: Broader EPC data – which includes buildings converted into apartments, housing cooperatives and the build-to-rent sector, which institutional investors are diving into – shows a consistently higher proportion of the New build apartments built in recent years. But even taking this into account, a weaker demand for housing is becoming apparent. Perhaps in part due to concerns about oversupply in some city centers, many homebuilders are now turning their attention to homes – the so-called single-family home market.

40%

of houses in Scotland are flats – compared to just under 25% in England

As for the pandemic, the flight from urban areas has been overdone: rents are now skyrocketing in cities across the UK and west. But it has clearly caused people to re-evaluate their housing options. Homes tend to offer more space, are more likely to have a garden, and benefit from not having neighbors upstairs or downstairs. But they cost more. As Chart 2 shows, home sales have soared over the past year from previous levels, while home sales have only just returned to pre-2016 levels. This suggests that while homes are preferred, for some buying an apartment is a better deal than options in the rental market – although the data also shows landlords are using the stamp duty savings to keep investing.

Line chart of share of home purchases by status (%) shows that nearly 80 percent of first-time buyers buy a home

Why is this a problem? It is linked to the notion of the housing ladder – a central pillar of British public and government attitudes towards housing over the last half century. The idea is that you start by stretching your finances at a young age to buy a small apartment of your own. Then, as your income increases, you can afford to exchange it for a terraced or semi-detached house. Then, thanks to a combination of rising home prices, career advancement, inflation, and falling interest rates, you can afford to trade into a larger single-family home.

But that’s too easy. It may be true that first-time buyers are more likely to buy a home than movers with mortgages (in 2020, 21 percent of first-time buyers bought homes, compared to 7 percent of movers). But the majority of first-time visitors are buying a home — and have been for 30 years. The risk is that apartments will end up being the only option for those struggling the most to buy their own home.

The luckier peers of homebuyers — who may have more help from “Mom and Dad’s Bank” or qualify for buyers’ aid — manage to skip a rung or two while getting stuck in an apartment that compares to houses underperforming You aspire to someday own.

If price growth slows or even declines (a real possibility given the cost-of-living crisis and rising mortgage rates), the relative gap between house prices could widen at a time when the ability to build equity and borrow more is growing will be restricted. Buying an apartment doesn’t always make trading a house easier.

The concentration of housing is not evenly distributed across the UK

It doesn’t have to be like this. Many other countries offer courses on how to make housing work better for households of all shapes and sizes. The solution seems to be a combination of design, construction, legal framework and – perhaps most difficult – public attitude. Just under a quarter of England’s housing stock is owner-occupied, while in Scotland it’s almost 40 per cent – thanks in part to tenements in Edinburgh and Glasgow. In fact, my last home as a teenager was an apartment in Edinburgh New Town. It was great for stumbling back from the pub, but there were still the noisy neighbors and other challenges of high-density living to contend with.

Buying an apartment can have more disadvantages than buying a house, but sometimes it’s the only option – maybe because of budget or personal circumstances. And while it may not be keeping an eye on the value of nearby homes, there are other – arguably more important things – to consider when buying a home than future price trends.

Neal Hudson is a real estate market analyst and founder of the consulting firm BuiltPlace

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