Since the announcement that the country would welcome back overseas migrants and students, there has been a shift in interest in the unit market, particularly in the centre of our major cities.
Eleanor Creagh, senior economist at REA Group, has pulled data for 13 charts to show the current state of Australia’s unit market and where it’s heading.
Extreme divergence between house and unit prices
Unit prices in both regional markets and combined capital cities racked up double-digit price growth last year, but that growth still greatly lagged houses and has done since the onset of the pandemic, Creagh explained.
As of March 2022, Australia’s median capital city house value was $850,000, compared to a median unit value of $590,000.
This marks a 44% difference – the highest gap on record.
However with affordability constraints kicking in, it’s like he did more buyers will turn to townhouses and apartments as houses are now out of their Rich, and this gap will narrow.
Unit price growth lags house price growth
PropTrack’s Home Price Index shows that national house values have appreciated 39% to March 2022 since the pandemic onset, whilst unit values have risen just 16% in the same period.
And the impact of the pandemic on housing preferences has clearly played a part.
As we already know, lifestyle suburbs have surged in popularity as many people make the sea- or tree-change shift to regional areas with close proximity to the CBD becoming less and less important thanks to our new flexible living.
At the same time, the pandemic made people re-evaluate what they want in a home.
Repeated lockdowns and the shift to working from home saw buyers flock to properties that offered more space, making house prices surge and leaving demand for units behind in the dust.
Buyers want properties with more space
The Covid-19 pandemic restrictions significantly changed homeownership goals and what Australians want most in their next home.
With more Australians working from home and juggling school and family commitments under one roof, spacious living fast became the top priority.
As a result, the price gap between units and houses has completely blown out since the pandemic hit.
Low interest rates have also provided an affordability boost for many, allowing people to service more debt, therefore increasing the capacity to purchase a house as opposed to a unit, Creagh explained.
Other factors that have contributed to the relative weakness in the apartment market are lower levels of investor participation, less overseas demand, and weaker rental conditions in inner-city markets.
Investor activity hits a record low
The weaker unit market, extreme difference in prices and overall weakness of the apartment market has been further exacerbated by a record-low level of investor activity in 2020.
These changes culminated in a shifting preference bias towards houses, with a premium being paid for these options, Creagh explained.
And the house price premium is most extreme in Canberra and Sydney where there is currently a price gap of more than 75% between houses and units in both cities.
Investor share of new housing lending, seasonally adjusted
House price premiums in major cities
The house price premium relative to the median unit price is most extreme in Canberra and Sydney.
And the data also shows that the house price premium extended the most throughout the pandemic in the inner Brisbane suburbs.
Here the inner-city price gap between houses and units has widened 50 percentage points since the start of the pandemic, Creagh said.
Premiums in the inner Brisbane suburbs extended the most
Creagh suggests that the extension could be a result of elevated levels of interstate migration into Queensland.
Like the sea-change shift we talked about earlier, the pandemic saw a surge in migration to the sunshine state in search of more affordable housing and lifestyle perks like more sun, less traffic and relatively less time in lockdown.
For the year to September 2021, Queensland added 58,000 people to its population.
That means Queensland’s total population growth increased by 1,100 people every week.
Will it continue?
The recent flooding; cooling NSW and Victorian housing markets; office callbacks and the removal of most Covid-related restrictions will most likely see interstate migration patterns settle back down to the longer-term averages.
House price premium most extreme in inner-city suburbs
Since the start of the pandemic through to March 2022, Brisbane house values have increased a staggering 48%, compared to just 15% for units, Creagh’s data shows.
“In fact, the unit price gap is most pronounced in weakened inner-city apartment markets, where a standstill on international migration and sharp declines in demand from tenants broadly have seen a drop-off in activity among prospective renters and buyers,” she said.
Overseas “for rent” search volumes have increased off low levels in recent months
Inner-city Melbourne apartment rents have fallen by nearly 25% over the last 2 years.
And since the pandemic started inner-city Sydney apartment rents fell 7.7%.
Of course, this was related to the impact of the border closures on these rental markets.
But now, people are returning to the CBD and international arrivals are looking to rent again.
But now that our borders are reopening demand for inner-city apartments should pick up as international students are returning to Australia after almost two years of closed borders.
But while some commentators are suggesting now may be a good time to consider buying an inner-city apartment counter-cyclically, I disagree.
Most inner-city apartments make poor investments and buying them cheaply doesn’t make them a better investment.
A secondary property will always be a secondary property and CBD apartments tend to have no scarcity, minimal land-to-asset ratio, no opportunity to add value, no owner-occupier appeal, and a limited demographic who want to rent them.
On the other hand, well-located, medium-density, family-friendly apartments in our inner and middle-ring suburbs can make great investments.
Rental listings are very low
Rental prices reached record levels at the beginning of the year, a trend only exacerbated further by very short supply and an influx of new renters into the market as sellers take the opportunity to sell while the market is hot (with nowhere to go).
And now the international borders have reopened, rental demand is expected to spiral further in major cities, particularly Melbourne and Sydney which historically welcomes more overseas migrants.
Demand for unit rentals outpaces that of houses in cities
House prices have risen significantly, and affordability constraints are kicking in, perhaps shifting buyer demand to more affordable options in the apartment market, Creagh questioned.
The same is true for renters, with the growth in unit rents having lagged houses since the onset of the pandemic, she added.
Updated price caps mean more choice for first-home buyers, particularly for units
As we previously mentioned, the reopened borders, relative affordability and tight rental markets have piqued investor interest.
And the Home Guarantee Scheme price caps will likely mean eligible first home buyers favour units, where they will have a lot more choice.
But while some are suggesting the investment proposition for units is set to become more favourable, particularly as rental yields are likely to improve with housing price gains slowing and rental price pressures accelerating, I don’t see the inner CBD unit market as a good investment opportunity.
Because, in my view, and as I mentioned also above, CBD apartments tend to have no scarcity, minimal land-to-asset ratio, no opportunity to add value, no owner-occupier appeal, and a limited demographic who want to rent them.
However, what is clear is that the changes are driving a shift in our unit market.
In fact, unit enquiry volumes surged by 21% in the first quarter of 2022 alone, the data shows.
The volume of unit enquiry on realestate.com.au is already 46% higher year-on-year when comparing the year ended March 2021 with the year ended March 2022.
Unit enquiry volumes surge
Unit enquiry volumes from investors are also high
What is ahead for our unit market?
Creagh expects residential property price growth to temper as the housing market cycle winds down from its peak and higher mortgage rates weigh on buyer demand and property prices.
“But it’s clear the cheaper property type has already picked up in popularity for priced-out home buyers and investors,” she said.
“Notwithstanding moderating property price growth, these factors all point to the potential for stronger performance in the unit market relative to the lag that has been experienced since the pandemic onset.”
Want to invest in a unit? Here’s a final word of warning
Even though the CBD unit market looks set to enjoy renewed growth now that Australia’s hard border closure has ceased, it doesn’t mean it makes good investment sense to buy in these areas.
In fact, I would say that very few apartments can be regarded as investment-grade.
That’s because a good investment property is one that has scarcity, land value and good performance
Whereas a CBD apartment lacks scarcity (an oversupply in some cases) or owner appeal meaning the value increase will always be minimal if any at all.
Here’s what you should look for instead
Family-friendly apartments in inner- and middle-ring suburbs in good neighbourhoods would make more investment sense.
This is especially during a time when the gap between house and unit prices is the largest it has been in a long time.
Most importantly, I always recommend that people engage an independent property strategist to help them formulate their investment plans and then employ a reputable and experienced buyers’ agent to assist them with selecting the right property to invest in.