Up until recently unit values were showing a stronger value performance compared with detached housing. Over recent months, with the gap between house prices and unit prices moving closer together, we have started to once again see detached housing outperform the unit market.
Over the 12 months to October 2013, the rate of value growth across the combined capital cities has been stronger for houses (8.2%) than it has been for units (5.9%). The commonly held view is that house values appreciate at a more rapid pace than unit values due to the underlying land value however; this has not necessarily been the case throughout most of the past five years.
Over the five years to November 2013, capital city house values have increased at an average annual rate of 3.7% compared to growth of 4.0% per annum across the unit market. If we look at the two previous five year periods we see that growth in house values outstripped unit values.
Between October 1998 and October 2003, house values rose by 15.0% pa compared to unit value growth of 11.1% pa. Between October 2003 and October 2008 house values increased at an average annual rate of 4.9% compared to 3.6% pa for units.
The stronger growth in house values over the preceding two five year periods highlights a time when houses were typically favoured over units however, this trend may have started to change over recent years.
As mentioned, value growth for houses has recently started to outpace that for units. What we are probably seeing currently is that the extremely low mortgage rate environment is resulting in a preparedness from buyers to stretch themselves a little further in order to purchase a detached house rather than a unit.
It will be interesting to see if the higher level of growth reverts to units over the coming year in Sydney and Melbourne as selling prices rise and affordability becomes more challenging for detached housing. Moreover, once interest rates begin to eventually rise we may also see the dynamics shift.
One of the main reasons why value growth has been more closely aligned between houses and units over the past five years comes down to affordability factors. As the second chart shows, the median selling price of a unit has consistently been between 10% and 15% lower than that of a house since early 2006.
Although that may not sound significant, the current difference is 14.8% which equates to $80,000 across the combined capital cities which is much more than a year’s average wage. A couple of other changes began to take place from early 2006.
It was at around this time that household savings levels began to rebound from record low levels. Also at this time we saw household debt and housing debt levels peak, although debt levels have not reduced significantly it may have contributed to rising demand for units as opposed to houses due to their relative affordability.
If we also look at dwelling approvals data we see that in recent years there has been a sharp escalation in the proportion of approvals for higher density product as opposed to houses. This is a trend which I would expect to continue, largely due to the lower prices of units and increasing demand for people to live in inner city areas and those located close to pre-existing transport infrastructure.
Over the 12 months to September 2013, 42.4% of all dwelling approvals were for units as opposed to houses. Although houses still account for the majority of dwelling approvals, the proportion of unit approvals has increased from: 38.9% a year ago, 33.2% five years ago, 34.2% 10 years ago and 29.6% 20 years ago.
It is also important to keep in mind that these figures are national; the proportion of unit approvals is generally higher in capital cities.
If you look at the dwelling approvals data over the past 12 months across the capital cities, you can see that higher density living in our major capital cities will be a central feature into the future.
More than 50% of all approvals in Sydney, Melbourne, Brisbane, Darwin and Canberra were for units as opposed to houses over the 12 months to September 2013.
Although many home purchasers probably still aspire to own a house as opposed to a unit, in reality it is becoming much more difficult to obtain, particularly in our major capital cities.
Affordable houses tend to be a long way from the city which is less desirable to many purchasers, as a result we are seeing a rising prevalence of higher density construction in our major capital cities, particularly within inner city areas.
These units not only tend to be significantly more affordable than houses within the same areas but from an investors perspective they tend to offer stronger rental demand and a higher subsequent rental return. These factors may lead to stronger demand from both investors and tenants and subsequent stronger levels of value growth for units as opposed to houses over the coming years.