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Australia’s red-hot housing market has seen incredible growth over the past few years, with median house prices rising a whopping 34% nationally since early 2020. Yet amidst this boom, there is one sector of residential property that remains surprisingly overlooked by investors – units.
While detached houses have skyrocketed out of reach for many buyers, unit prices have lagged far behind. This widening gap begs the question – could units present an undervalued opportunity today for savvy property investors?
The Growing Disparity Between Houses and Units
According to the latest research from CoreLogic, the difference between average capital city house and unit values has ballooned from 17% pre-pandemic to a massive 45% today. To put some hard numbers on it, the median Aussie house price is now about $240,000 higher since March 2020 while the typical unit has increased only $65,000.
The affordability gap is even more extreme in dearer markets like Sydney, where houses cost approximately $570,000 more on average than units as of early 2024. With this surging premium for detached homes, units appear relatively cheap in comparison. But why have they lagged so far behind houses when it comes to price growth?
Why Units Have Underperformed in the Boom
Experts point to a few key reasons why units have severely underperformed detached houses:
- Entrenched Preferences – Australians have an enduring desire for space and land that comes with standalone properties over higher-density products, even if apartments better match budget constraints. This scarcity factor accelerates house price inflation.
- Rental Demand Deflection – Overseas migration in recent years has been oriented more towards renters rather than buyers initially. While migrants help increase demand for units, the benefits accrue to landlords rather than enhancing property valuations.
- Domestic Purchasing Power – Much of the recent property boom has been fuelled by cashed-up domestic buyers better able to afford houses, especially with ultra-low interest rates. Supply shortages also benefited houses.
As affordability continues to worsen and purchasing power declines though, we could see more demand funnel toward the medium to high-density unit market out of financial necessity – if not overt preference.
Signs Point to Units Possibly Being Undervalued
While houses clearly remain the prize for most Australian property hunters, market analysts say units might actually be undervalued presently relative to more traditional detached homes.
A few indicators back this idea:
- Higher Rental Yields – Gross rental yields for units are substantially above those for separate houses, signalling cheaper valuations on a relative basis.
- Growth Potential – Unit price growth rates have room to rise and close the gap with standalone dwellings as affordability pressures worsen.
- Location Still Critical – Not all units or unit markets hold the same opportunity. But in many areas, swelling demand against limited supply for apartments could spark growth.
Smartly Evaluating Unit Investment Potential
While the data hints at possible value in the unit sector currently, investors need to approach any product with eyes wide open. Extensive due diligence and local market research remain critical, especially in areas of historical apartment oversupply such as the Brisbane inner-city suburb of Newstead.
Here are a few expert tips on evaluating unit developments and markets for investment merit:
- Lean on the data and analytics from sources like CoreLogic, RealEstate.com.au and PropertyValue.com.au to assess rental yields in different unit markets along with historic growth trends. This quantifies value potential.
- Analyse local market fundamentals – Are population and job numbers rising to drive more demand? Is transport and infrastructure expanding? What restrictions govern new supply?
- Carefully vet any new development – Builder reputation, construction quality, amenities offered, management and maintenance fees, etc. all matter immensely.
- Think long-term liveability and potential for future demographic demand rather than aiming to flip for quick capital gains. Quality stands the test of time.
The unit space today contains many alluring investment options but also remains prone to bubbles and oversupply risk in places. Avoid speculation and work with experienced property professionals to identify developments and locations that offer sustainable value for money.
Is Now the Time to Buy Into Units?
As Australia’s housing affordability crisis intensifies, the discounted and higher-yielding unit sector warrants consideration by yield-focused investors.
Detached houses may continue outpacing apartment price growth, keeping the valuation gap wide. But indicators point to units potentially being undervalued presently relative to frenzied house prices.
In well-chosen markets and developments where population fundamentals support sustainable demand, units could generate strong rental incomes with room for solid capital appreciation as well.
Of course, the devil remains in the details when evaluating any property. We advise speaking to our expert team at KeyPoint Accountants to explore how strategic real estate investment might enhance your portfolio’s diversity and returns. You can contact us at 07-5585-0600 or info@keypointaccountants.com.au.
With careful research and advice, units could unlock the value potential that the raging house market hides. Get in touch today to discuss your options further!
Disclaimer: This article is intended for educational purposes only and is specifically not intended as any form of investment advice. Please seek the advice of suitably qualified professionals familiar with your personal circumstances before entering into property investment.
