The last 2 months saw a fall of the annual performance gap between houses and units, from a record high of 28.3% in January to 8.7% in March.
As noted by CoreLogic, units recorded a 0.3% rise in values over March much like its growth rates from the preceding two months. This resulted in a total increase of 0.9% in the first quarter of 2022, while house prices rose 0.8% in March and 2.8% in the first 3 months.
While national houses are recording greater growth in comparison to units, it has also appeared to decelerate at a much faster rate. This pace of growth has dropped by nearly 5 percentage points, compared to a 3.8 percentage point drop in the unit market.
Source: Corelogic’s monthly Unit Market Update
But why apartments are so underpriced in comparison to houses?
1. Housing preferences during Covid 19 pandemic
According to PropTrack’s Home Price Index, house values have risen 39% since the pandemic, while unit values have risen only 16%. And yes, we’ve all heard that this was due to the pandemic’s impact on housing preferences.
During the lockdown, lifestyle has become a greater priority over proximity to the CBD. The experience of lockdowns made apartment living less appealing, with many people desiring more space and larger homes.
2. Low-interest rates provided an affordability boost
The interest rate in Australia has been held at a record low of 0.10% since November 2020, allowing home buyers to service more debt. This increases their ability to purchase a larger home, while also pushing up house prices.
3. Low level of investor activity
During the lockdown, Australia’s border is closed, resulting in less overseas demand and weaker rental conditions in inner-city markets. As a result, investor participation in the apartment market reached a new low, shifting preference bias towards houses.
In fact, the unit price gap is most pronounced in weakened inner-city apartment markets, where demand from international migrants and tenants has declined sharply.
However, as we enter COVID-normal, a lot has changed!
1. Demand for units outstripping houses as cities make a return
Reopened borders, relative affordability and tight rental markets have piqued investor interest.
“This is due to the relaxed restrictions around international travel earlier this year, where overseas arrivals tend to be renters, and tend to be concentrated in densely populated parts of cities.” , according to CoreLogic’s Research Analyst Kaytlin Ezzy
And the investment proposition for units is likely to improve, particularly as housing price gains slow and rental price pressures increase.
2. Housing affordability
It seems that affordability has and will continue to be a major contributor to the conditions of the property market *not necessarily good news*, and is something that most people take into account when buying and investing.
Evidently, this is due to the higher inflation rate and the rising cost of living which has significantly impacted the difficulty of saving for a deposit for prospective buyers. And yes, this has increased in recent years too!
House prices have risen significantly, and affordability constraints are taking effect, potentially shifting buyer demand to more affordable apartment options. And since units tend to be cheaper, it is usually easier to save for a deposit, making them the better option for most first home buyers.
3. Updated price caps in The Home Guarantee Scheme
The Home Guarantee Scheme price caps is updated recently, and eligible first home buyers will likely prefer units, where they will have a lot more options.
The housing market is shifting toward apartments!
According to realestate.com.au’s latest report, the volume of unit enquiries increased by 21% in the first three months of 2022 compared to the same period in 2021. This is definitely the first good sign for the unit market!
Capital Cities VS Regional Markets
Recent research has shown that Sydney and Melbourne unit markets have declined, while the unit markets of other capital cities like Brisbane and Adelaide are growing strongly above 4%. A typical unit in Sydney is pricier than a Brisbane unit and more than double that of Adelaide.
Although the growth rate of Hobart, Darwin and Canberra has been and will continue to increase, this pace has eased up in the previous month.
According to Domain chief of research and economics Nicola Powell, this is especially prevalent in Canberra.
“What’s interesting about our unit market in Canberra is that it’s seeing a slower pace of price growth compared to houses and I think that in itself makes it much more affordable for a first-time buyer, as well as investors – [from] whom we’ve seen rising activity over the last 12 months…”, said Dr Powell
“and I think those two factors will be helping to support demand for units.”
This has made units in the capital territory a more affordable and popular choice *YES!* for home-buyers and investors alike as evident by the increased activity by these property buyers in the past year.
Moreover, the regional markets of the country have observed better unit growth than houses.
In a state by state comparison, four of them performed exponentially better with regional Queensland being proven to have the highest increase in unit value with a growth rate of 5.9%.
Following this are:
- Western Australia (4.3%)
- Victoria (3.8%)
- NSW (3.6%)
- Tasmania (1.7%)
- South Australia (0.5%)
Within NSW specifically, areas like Kiama and Wollongong are noted to be favoured by property buyers and investors because of this growth.
Bright future for the unit market
In terms of affordability, it’s clear that the cheaper property type has already gained popularity among priced-out home buyers and investors. This increase in the demand for apartments, turned it into a more favourable option, especially as an entry point for most first home buyers.
Regarding investment opportunities, according to Ms Ezzy, units are a beneficial investment opportunity because of the rental return.
“units are currently rising faster than capital growth and faster than detached house rents”, she said, that proving its desirability amongst property investors.
Despite the current slowing of property price growth, the above factors all point to the possibility of a stronger unit market performance than the one seen when the pandemic began.
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