The property market in Australia has seen tremendous growth since the COVID-19 pandemic began in early 2020. However, not all housing types have benefited equally. According to new data from CoreLogic, there is now a massive 68.4% gap between the median prices of houses compared to units in Sydney. This pricing gap has widened substantially across the major capital cities over the past few years.
House Prices Have Risen Much Faster Than Units During the Pandemic
The research clearly shows that standalone houses have massively outperformed units and apartments during the recent Australian property boom. Looking at the combined capital cities index, house values have surged by 33.9% since March 2020. In dollar terms, the median house price has increased by approximately $240,000 over this short period. Units, on the other hand, have risen by just 11% or $65,000 in median value. This means the total price gap has blown out from around 17% to a massive 45% between houses and units across the capitals.
Drilling down to Australia’s largest housing market in Sydney, the numbers are even more staggering. Back in early 2020, the median Sydney house cost 33% more than the typical unit in the city. Fast forward three years and houses now command a 68.4% price premium over apartments based on much stronger growth. In actual dollar terms, the gap has expanded from $268,500 to a sizeable $569,500. So what factors are driving this increasing divergence between houses and units?
Why Have Houses Outperformed Units?
There are several reasons why detached house prices have risen at a much faster pace than units during the recent property upswing:
- Australians prefer single-dwelling homes with more personal space, land, and privacy. The resilience of house prices suggests buyers are willing and able to pay an ongoing premium for these attributes.
- The property rebound has been largely driven by domestic home buyers rather than overseas migration. Local purchasers so far have focused more on houses than smaller units that tend to appeal to migrants and students.
- Record low mortgage rates have enabled affluent Aussies to upgrade to larger, more expensive houses. This demand is outstripping supply availability, further inflating house prices.
- The old adage that “the value is in the land” still has plenty of truth to it.
While apartments and units tick many boxes for lifestyle, affordability and yield, houses continue holding their status as the “Great Australian Dream” that families aspire to own. Even amid worsening housing affordability, it seems buyers are digging deeper to achieve that dream, while units are viewed by many as a temporary stepping stone to eventually buying a house.
Is There an Opportunity in Units?
Given the far slower price growth for units relative to houses in recent years, the question arises whether apartments currently represent some value opportunity or are simply underperforming. The data suggests units do look undervalued relative to the detached housing market on a few measures:
- Capital growth lag – Unit price growth severely trails the growth in house values. This indicates possible catch-up potential if apartments come back into vogue with buyers.
- Rental yields – Gross rental yields for units in cities like Sydney and Melbourne remain around 4% to 5%. This is a sizeable 1.5 to 2 percentage points higher than average house rental yields. So units continue generating better rental income returns.
- Affordability pressures – As rising prices and rates erode housing affordability further for many buyers, this could well deflect some demand towards the more affordable unit market over houses.
In other words, while houses seem likely to continue outperforming units in the near term, the unit market does look comparatively undervalued after its weak showing. Units could represent a quiet achiever in the years ahead as rents and demand pick up from their currently depressed levels.
What This Means for Business Owners
For business owners and investors, the divergent trajectory between houses and units has several practical implications to consider:
- With interest rates at potentially peak levels, generally real estate price growth is expected to moderate in 2024, although in selected pockets its hard to say that there is current evidence of this dynamic! Any softening or slight downturn is still likely to impact unit markets more than detached houses.
- Unit rents will continue rising – While unit price growth has been muted, rents have been rising briskly, especially with overseas migration picking up pace again. Landlords can expect robust rental growth to continue as population growth outpaces sluggish unit construction. For small businesses, escalating shop rents are an obvious cost pressure in this environment.
- Students and migrants prefer rentals – The return of international travel means student numbers and broader migration rates are recovering. Most new arrivals prefer rental accommodation initially. This rental demand looks set to tighten vacancies further in the unit market where these tenants typically reside.
Thus, business owners face inflationary costs from the property market as higher interest rates, higher rents, and increased staff salary expectations start flowing through. While house price growth should ease back, any downturn still appears unlikely to fully offset the strong gains achieved during the pandemic rebound.
Speak to the Experts at KeyPoint Accountants
For business owners and property investors trying to navigate this complex market, understanding the key trends is essential. Our team of qualified accountants and tax experts at KeyPoint Accountants in Varsity Lakes can provide guidance and insights on how to structure your affairs to best weather coming changes in the real estate sector. Contact us at 07-5585-0600 or info@keypointaccountants.com.au to discuss how current property conditions could impact your business or investments.
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.
