Townhomes: How a niche product is becoming a necessary solution

An undisputed affordability advantage

There is currently widespread commentary focused on a property price downward trend. The commentary is valid. Melbourne’s established house prices fell 2.9% in Q2, already 3.9% below its recent peak at the end of 2021. But the fact remains: Melbourne’s average house price is still over a million dollars.

This is a significant barrier for new buyers to enter the property market, and coupled with a tightening lending environment with sharp monthly rate increases since May, it impacts all prospective buyers – particularly first home buyers.

The rate rises have a material impact on borrowing rates. For instance, a couple with no children, average living expenses (according to the Household Expenditure Method – HEM), a 10% deposit and $100,000 household income had a purchase capacity of $760,556 in April 2022 (excluding Government charges and state grants). If the forecast plays out to the projected 3.35% cash rate by December 2022, this same household will only have a purchase price capacity of $549,778.

This stark reduction is solely impacted by the cash rate. But it influences variable rates and serviceability thresholds placed on customers by the banks. That is, if the forecast 3.35% is reached by December, an average variable rate will be around 5.66%. And while this is the rate customers repay the loan at, their borrowing capacity will be based on
8.66%, as APRA’s serviceability rate has been increased to 300 basis points.

A welcome alternative

Townhomes have emerged in recent years as a housing type with many of the attributes of a traditional family home. And as such, it requires little psychological change from commonly-held buyer expectations.

This increasing trend is on the back of several variable factors. The first is the ageing population, and the increasing number of households made up of singles and couples without children. Secondly, first-home and budget-conscious buyers are being priced out of the established market. But while price plays a significant role in purchaser decision-making, varied buyer groups will have different lifestyle needs, and these need to be reflected in dwelling choices – including proximity to work and amenity, as well as space and layout.

The increasing prominence of townhome activity can be contributed to a number of advantages, not least the ability to respond to differing buyer requirements.

A place to call (town)home

The importance of design is the driving force behind transforming residential housing types. Townhome designs are inherently flexible, catering to a multitude of buyer types with versatile layouts and functional areas, varying number of bedrooms and storeys. This adaptability has resulted in accelerating interest from all buyer generations and groups – including investors – with affordability one of the key appeals.

Across the property market, lot sizes are decreasing. This trend has been driven by affordability and supply-side factors, but also through lifestyle requirements. The value of retail, entertainment, social and other amenities has increased, and in many cases, the demanding occupations and commitments of residents leave little time for maintaining
large gardens and homes.

While townhomes cater to this lifestyle trend, they are deceptively spacious internally. From the street, a townhome is generally narrower than a freestanding house, but intelligent design ensures each internal space is not only functional, but spacious. Additionally, from a developer standpoint, townhomes provide greater yield opportunity, appeal to a wider market, and help create an aesthetically pleasing mix of dwellings within a development.

In today’s market, almost all greenfield estate masterplans contain at least 10-15% of townhomes within their product mix. In fact, several new greenfield estates contain exclusively townhome products.

This article was featured in our Q2 2022 Greenfield Market Report. For the full report, click here.