House vs. Unit Values: The Growing Price Gap
Houses typically are priced higher and outperform units with respect to value growth, and data shows this has overwhelmingly been the case over the past four years.??
But with home prices continuing to lift and borrowing capacities reduced substantially by the significant interest rate tightening since May 2022, affordability constraints are seeing this gap beginning to narrow in some regions.?
The difference between median capital city house and unit values was just $85,000 at the start of the pandemic in March 2020.??
As of June 2024, the house price premium has surged to historic high levels of 47%, equating to more than $300,000.?
In inner city suburbs, this trend is even more pronounced, especially in Sydney where the median house in an inner ring suburb is more than twice the price of a median unit – a more than $1.5 million dollar gap.?
The house premium rose sharply through the pandemic price boom as people sought out more space, record low rates allowed many to take on more debt, and many were able to live further afield in our cities.?
House values have experienced rapid growth, increasing by 47.7% compared to pre-pandemic levels. The growth in unit values has been more moderate, up just 23.9% over the same period.?
While the house price premium contracted through the early stages of the rate hiking cycle as house values fell more than unit values, across the combined capitals the gap between house and unit values has since rebounded to a new record high.??
House values have risen at a faster pace since the start of 2023 when the housing market began to recover the sharp falls seen in 2022.?
Since March 2020, capital city house values have increased by 44.2%. In contrast, unit values over the same period are up only 16.8%, with Sydney, Perth and Adelaide experience the largest gap between growth in house and unit values over this period.?
However, over the past quarter unit values have grown at a faster pace in the capital cities and the trend seen over the past four years is beginning to ease, dependent on price points. In some regions this shift is even more pronounced.?
Although affordability has deteriorated significantly, affordability constraints have been outweighed by a demand supply mismatch fueled by strong population growth, subdued home building activity, home equity gains, resilient labour market conditions, tight rental markets, and smaller household sizes. These factors have all contributed to the continued lift in home prices over the past 18 months.?
The PropTrack Home Price Index shows shows national home prices lifted 0.18% to a new peak in June, and with housing supply unable to meet demand, national home prices have cycled through 18 consecutive months of growth to hit a fresh peak in June, even though the pace of growth slowed as winter began.?
Prices are up 10.14% from their December 2022 low, lifting 3.14% year-to-date to sit 6.55% above June 2023 levels.?
In early 2023 when the home price recovery was underway the top end of the market led the recovery.?
However, as interest rates continued to lift in 2023 and households remained under pressure, affordability became a stronger driver.?
With the substantial lift in interest rates, maximum borrowing capacities have been reduced by about 30%, meaning significant decreases in potential loan amounts and budgets for buyers. This has pushed buyers constrained by borrowing capacities toward more affordable options.?
Homebuying demand has continued to outpace supply as the housing upturn has continued, though many buyers are governed by what they can afford, causing some to make trade-offs with location and property type.?
Cheaper homes have had a stronger growth trajectory relative to more expensive ones. Cheaper markets have also generally recorded stronger growth.?
Not only are more affordable regions seeing stronger growth but units, the more affordable property type, have generally experienced stronger growth in regions where units present the steepest discount relative to houses.?
In inner Perth and Sydney’s Ryde SA4 regions, where a typical unit value offers an almost 70% discount relative to houses, units have growth at a far stronger pace over the past year than regions where the unit discount is closer to just 20%.?
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More affordable regions and property types have generally seen stronger growth in prices, and units have recorded stronger growth over the past year in regions where they offer a steeper discount.?
This is particularly evident in Queensland. In Brisbane’s inner city where median unit values present an almost 60% discount to houses, unit values have risen almost 16% over the past year compared to growth of around 2% in regions where the unit discount is closer to 20%.?
In regions where units trade at a steeper discount, not only have units seen stronger price growth, but the rate of growth is generally outpacing houses.?
Again, in Brisbane’s inner city where a typical unit value presents a steep discount relative to a house, unit price growth is outpacing that of houses over the past year.?
However, neither of these trends are evident in Victoria. Broad price momentum is weaker in Melbourne, which has been the worst performing capital city market in terms of growth since the pandemic onset.??
The gap between house and unit value growth in Melbourne in this period has not been as extreme as other markets either, with only Hobart and Canberra experiencing a lesser extension in the house price premium since the pandemic onset.?
Units typically pose a more affordable entry point for owner-occupiers looking for a first home, or investors. These trends could in part reflect the pickup in investor activity and first-home buyer activity, with demand from these types of buyers often skewed towards lower price points.??
But the trends are also reflective of affordability constraints and lower borrowing capacities diverting demand towards cheaper housing options.?
Stronger demand for inner city living post-pandemic, coupled with the rapid rate of population growth alongside the relative value units offer are also likely to be buoying buyer demand in these regions.?
Apartment sales volumes over the year to May 2024 have also lifted relative to the same period in 2023 and were almost 20% higher than the same period in 2020.?
This comes after a significant price boom and substantial lift in interest rates, whilst growth in household incomes has fallen short contributing to poor affordability.?
Apartment sales over the year to May 2024 have also taken up a larger share of total sales volumes than any year over the past 5 years, in every capital city.??
The share of apartment sales has increased most in Sydney, Perth, and Brisbane – the least affordable capitals and markets that have seen consistently strong growth and a significant widening of the house price premium.?
This corroborates the trend seen in price developments, with buyers constrained by borrowing capacities being diverted toward more affordable options.?
With home prices expected to continue to lift in the months ahead, further home price growth will continue to pose affordability challenges.?
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