House and Unit Growth Disparity Widens

The latest property market research reveals that Sydney continues to outgrow all other major markets, despite becoming increasingly unaffordable for many buyers.

Figures for March 2015 show that Sydney’s median house price is now $929,000, after increasing 16.8% in the year to March. Affordability in this market continues to deteriorate, particularly in the house market - Sydney houses are by far the most unaffordable dwellings in the nation. Table 1 presents affordability figures for all capital cities.

Table 1: Affordability

Table 2 presents the summary of results for the major city markets for March 2015.

Table 2: March Property Update

Following Sydney, Melbourne was the next best capital city growth performer. You will note from Table 2 the drastic change in Melbourne house prices - houses in this market recorded the strongest growth in the month of March alone (2.27%), and had an annual growth rate of 8.68%. This exceeds its long term average growth rate of 6.46% per annum.

Adelaide and Perth houses were the worst performing state capital house markets in March, with each house market recording negative growth of -0.39% and -0.65% respectively. However, both cities experienced better growth in unit values, with each market performing above the national average (0.18%).

Overall, the capital cities that experienced the poorest performance in March were Brisbane and Darwin, with growth in each respective house and unit market being below the national average.

Looking to the future, Brisbane houses have the best growth prediction over the next 8 years, while the Sydney house market is the only other market anticipated to perform at or above the national average. Table 3 presents the predictive growth forecast for capital cities over the next 5 and 8 years. Growth displayed is the expected annual average rate of growth.

Table 3: Predictions

Let’s now take a closer look at our top growth performers - Sydney and Melbourne.

Sydney and Melbourne 
House and Unit Growth Disparity Widens

Graph 1 displays the monthly house and unit growth trends for both the Sydney and Melbourne markets since March 2011.

Graph 1: Sydney and Melbourne Growth Trends

The trend data in the graph is slightly different to the data presented in Table 1 because it represents a ‘best-fit line’ as a result of smoothing out the growth rates over time.

Note the divergence in the trend lines between Melbourne houses and units, represented by the dark blue lines. From December 2014, the growth in value of Melbourne houses increased, while units have been trending down to almost zero per cent. The data in Table 1 confirms this, showing the Melbourne units have declined in value by 0.08% in the last quarter.

Sydney properties are also displaying a larger divergence in growth for the two different dwelling types. The current housing boom has really emphasised the idiosyncrasies of the two markets. Although units will present as relatively affordable, it is clear they do not produce higher returns.

At the current rate of approvals, I would argue new units are a mal-investment of resources in the long term. Developing dwellings for investors sees a higher incidence of unit development, which creates lower living standards for tenants and more competition in the housing market for owner-occupiers, as less new houses are developed. This is supported by the latest housing market survey from NAB, which shows the majority of foreign investors purchased units (53%), followed by houses (30%) and land for development (17%)[1].

While similar data was not available for domestic investors, units are the most appealing asset because they require low maintenance and are relatively affordable.

Approval data from the ABS also shows the incidence of increased unit development along with investment. Graph 2 displays this data between 1995 and 2015.

Graph 2: Australia-wide Approvals

Approvals for units have outstripped approvals for houses only twice in recorded history – September 2013 and January 2015.

Last month, John Edwards posed the question of whether people would prefer to live in a house or unit, and assumed people would prefer a house and garden. I think this situation, where tenants, first home buyers and low income earners are priced out of houses and into units, can be clouded by arguments about a changing lifestyle of younger generations.

Perhaps people waiting longer to have children could explain entry into a unit as opposed to a house – people might have more of a capacity to move into a unit before buying a house when they don’t have children. However, in my research I found that the median age of people having children is largely unchanged from 1995 (29 years old) to 2015 (30 years old), yet Graph 2 displays a significant upward trend of unit approvals in this period.

Another explanation could be the planning of our cities. Most of the entertainment, employment, cultural activities and services are found in cities. Development in Sydney in particular has taken place in the form of haphazardly planned dormitory suburbs. Consequently, pressure is placed on our roads and public transport as people commute for hours from home to work to home. Trading in commute times for a low maintenance, conveniently located property could be another factor at play in the drive for units. This is supported by population-weighted density figures, which have risen at higher rates in Sydney than any other city – population-weighted density increased approximately 15% between 2000 and 2012.

However, I do believe that if Sydney was well-planned, this density may not be as severe. Australia has ample space, and the technology is available to distribute resources widely. In spite of this, developers have largely not yet sought to integrate new houses with work places, good transport, local industry and ample entertainment facilities. If people recognise the importance of planning, then high density, low quality units would likely become redundant.

It is understandable that investors have been tempted into the high returns of the Sydney property market. However, I would say that continued investment in units is not favourable. Historically, houses have outperformed units, and they have suffered less in periods of correction. Well built houses on large blocks of land will retain value because they come with land and present all sorts of potential for development, extension and spacious living.

A final consideration is the unusual volatility in this lengthy boom. Property is a long term investment that has historically trended upwards, but the increase in the range of returns in the last 20 years suggests that they are becoming less safe.

To get a sense of how volatility has grown over the past two decades, we can consider the range of capital growth values over time for Sydney metropolitan houses.

For example, in the period 1990 to 1995, the Sydney market saw losses of 1% per annum and highs of 10% per annum. The range of returns in this period is 11 percentage points. Between 1995 and 2000, this range widened to 15 percentage points, and between 2000 and 2005 it widened further to 29 percentage points. Over the past five years, the range of returns has remained at 23 percentage points with growth fluctuating between -3% and 20%. These sustained higher ranges point to larger volatility in housing returns.

Furthermore, household debt is at record highs, and growth in the New South Wales and Victorian economies are currently heavily reliant on continued construction of infrastructure and dwellings. Such growth is not sustainable and should be kept in mind as we cautiously move forward over the next few months.

Source: Eliza Owen, Market analyst and economist at