The 2021 property boom saw property prices rise at an unprecedented rate around the country, with house prices stealing the show, soaring 25.5% while units rose by a more modest 7.7%.
But now the property market is cooling, prices are dropping from their peak, lending costs are soaring and demand is declining… and the trend for a widening price gap has begun to reverse.
Recent CoreLogic data shows that since the Reserve Bank of Australia (RBA) started raising rates in May, the gap between house and unit prices has narrowed in most capital cities, the Australian Financial Review reported.
The data shows that houses are losing value faster than units across the board.
For example, from May to July this year, Sydney’s median house prices dropped 5.3% while unit prices fell 3.1% during the same period.
That means that the premium for Sydney houses over units shrunk by 2.2% to 67% in July - or narrowed a $539,883 difference from the $574,366 recorded in May.
It was a similar story in Brisbane, which saw the price difference between houses and units tighten by 2.4%, and in Adelaide, the gap fell by 2.2%.
Canberra posted the sharpest drop in the housing premium over units, falling by 5 percentage points to 67 per cent.
Houses in Canberra are worth $421,784 more than units, less than the $479,966 recorded in May.
Meanwhile, the smallest drop was seen in Melbourne - the gap here narrowed by just 0.6% with houses now worth $350,599 more than units versus a $363,130 gap prior to the RBA began hiking rates.
The difference between house and unit prices surged during the pandemic as homebuyers re-evaluated what they wanted in a home and opted for detached housing with more space in order to survive the Covid-19 lockdowns.
But now that the downturn has set in, houses are losing more value than units.
“As we move further into the downwards phase of the cycle, the annual performance gap between national houses at 9% and units at 4.65 has continued to narrow,” CoreLogic economist Kaytlin Ezzy told the AFR.
“While houses typically outperform units during the upswing of the cycle, they have also historically recorded larger declines through the downswing,” she explained.
And going forwards, with several more rate hikes expected throughout the remainder of the year and a surge of new listings, downward pressure will likely be put on prices, she explained.
“While strong rental growth and the lowest unemployment rate in nearly 50 years should help the broader housing market by bolstering investor demand and minimising distressed sales, it’s likely dwelling values will continue to decline as interest rates rise,” she said.
“Despite unit values being historically less volatile than house values, thanks in part to their relative affordability, it’s likely unit values will continue to decline as we move further into the downwards phase of the housing cycle.”
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The price gap between houses and units is narrowing as house prices fall back from record-highs seen last year, but low supply could see unit values rise and the gap tighten even further.
Charter Keck Cramer’s latest state of the market H1 2022 report shows that over the 12 months to June this year, apartment construction in Sydney, Brisbane, and Melbourne has fallen to the lowest level in each city for at least ten years.
The report shows that Sydney apartment commencements fell to 7,700 in the latest financial year, down from the 2017 peak of 31,000 and still well down on the 14,300 commencements of 2013 when the last apartment boom was building up.
Meanwhile, in Melbourne, the city recorded 5,900 new apartment commencements last year, down from 24,300 in 2015 and 11,900 in 2013.
And according to the report for Brisbane, the contrast was also stark, with just 1,900 commencements last year, a fraction of the 13,300 of the 2016 peak year and still less than the 2,400 of 2019.
Charter Keck Cramer said that the reduced supply was due to a number of factors, including tighter restrictions on overseas investors, capital control on the export of cash from China, and widely publicised problems with combustible cladding and building defects in other apartment buildings deterring buyers.
However, the unit market does have several headwinds which are expected to boost prices in the near term.
Rising borrowing costs make the more affordable unit market seem more appealing to buyers, while the steady increase in overseas migrants at a time when construction has all but ground to a halt is expected to put pressure on supply.
This imbalance of supply and demand is expected to make unit prices increase, which would make values climb closer to those of houses.
When it comes to property investment, lower house or unit prices alone aren’t enough alone to warrant a good investment opportunity.
‘Cheap’ property will always be ‘cheap’ so don’t get lured into thinking you’re getting a bargain.
Moving forward, it is likely that house prices will grow more than apartment prices over the next couple of years, however, well-located townhouses which have their own significant land component will make excellent investment properties and are currently in strong demand by many first-home buyers who are being priced out of the housing market.
Townhouses, villa units, and family-friendly apartments will be great investments over the next decade, especially considering their current affordable entry price compared to houses.
My advice to investors is to avoid:
- Packed high-rise apartment towers
- Locations right in the thick of the CBD – they’re over-supplied and have low growth drivers.
- Highly-featured complexes with lots of shared spaces that are expensive to maintain, like lifts, pools, and gyms
Instead, I suggest you look for larger apartments and units in middle-ring suburbs, which are close to good schools, parks, and cafes.
Throw in some good public transport links, and you’ve got the ideal investment for the Australian family of the future.