Typically, units cost less than houses and can provide a more affordable entry point into property ownership compared to houses for many homebuyers.
Ten years ago, the median price of a house located in a capital city commanded a 9%, or $44,000, premium compared to a median priced unit. At the onset of the pandemic in March 2020, the premium stood at 14%, or $80,000.
Just four years later, and the price difference between houses and units has ballooned, peaking in April this year at a staggering 45%, or $285,000.
This premium is well above what was seen historically and can be attributed to the boom in house prices seen during the pandemic, when exceptionally low interest rates bolstered borrowing power, and buyers wanted more space.
But now, there are signs that the underperformance of units relative to houses could be coming to an end. In recent months, there have been growing signals that the house price premium has reached its peak and may be starting to decline, slipping to 43% or $280,000 in August.
Furthermore, comparing the price and supply of newly developed units to existing stock points to a potential comeback for units which could further erode this premium.
Part of the reason for the underperformance of units over the past decade has been an oversupply in markets such as Melbourne and Brisbane, which saw a boom in new development between 2015 and 2020. Now, the reverse is occurring.
Approvals to develop new homes have fallen across the board over the past two years – a result of escalating construction costs, higher interest rates, and labour shortages.
But whereas the number of house approvals over the past 12 months was down 12% from two years ago, the number of non-house dwelling approvals has fallen even more sharply, down 23% over the same period.
In part, this has to do with the lower price point of apartments. Currently, the cost of building an apartment is greater than the cost of building a house, due to higher planning, construction, and insurance complexities.
In many cases, the current market price of apartments is not high enough for the feasibility of the development to stack up. As a result, many of the apartment projects that are currently being delivered are premium developments selling at higher price points.
Across the established apartment market, 85% of for sale listings over the past 12 months were priced below $1 million. Across new apartments, in contrast, just 46% were priced below $1 million.
When it comes to houses, the reverse is true, with 55% of established houses priced below $1 million over the past 12 months versus 79% of new.
In the case of houses, location is the primary factor behind the more affordable price point, with the majority of new houses located in the outskirts of metropolitan areas where land values are lower.
New apartment developments, in contrast, have increasingly targeted cashed-up downsizers who can afford to buy in at a higher price point.
The implication here is that there has been a sharp reduction in the number of affordably priced units being developed. Over time, this will drive increased demand in the established apartment market which will push prices higher.
