Units are the perennially ugly duckling. But they’re due.
“You’re not a fan of units are you, Jon?”
Well, actually I kinda am.
I tend to avoid the high-rise off-the-plan stuff. There’s just not a lot of ways you can add value in that story – I tried to get a subdivision through once but council kept knocking it back, “blah blah can’t put a dividing wall in a toilet blah blah.” And there’s a lot of stock that’s pretty much exactly the same.
But I do own quite a few 70s apartment blocks. They’ve got strong bones, they’re often well positioned, and they can be great for a reno-flip.
And I think this strategy might be about to step into its own.
Because I think units are probably due for a run.
There’s a few reasons for this.
The first thing to note is that the differential between units and houses has exploded to record levels.
When you compare the median price of each segment, units have done pretty well since Covid, but nothing like the explosive growth we saw in detached houses. Units pretty much grew on trend, while detached houses went exponential.
Units are up 11.2%, houses are up 33.9%:
What’s that meant is that the premium you pay for a detached house exploded too. The median house was just 16.7% more expensive than the median unit. Now it’s a full 45% more!
That’s huge. In dollar terms, the premium is just under $300,000 now.
But that’s the Australian median. In the big capitals, the premium is obviously a lot more. In Sydney it’s $567,000!
In percentage terms it’s a whopping 68.4%
Although it’s over 50% in all the big cities.
Now, I just can’t see this differential lasting.
I mean, sure, for most people, living in a detached house is better than living in a unit. But $500,000 better?
What I think we’re going to see is a flight to affordability.
Units have typically been the first rung in the property ladder for a lot of people.
But as house prices have exploded, they’re now becoming the second, third and fourth rung for a lot of people as well.
What that means is that there are more and more people making up the unit demand segment.
It’s not just your newly-wed first home buyers anymore. It’s your couple with young kids looking to trade-up as well.
So as demand concentrates in this segment, the differential should compress.
Now, that can happen one of two ways. Either units catch up to houses, or houses fall back to unit prices.
There’s nothing in the data that suggests that house prices are going to fall, so it seems certain to me that units will lift.
And think about the potential here.
Do the back of the envelopes. Median houses are 950K, units are $650K. If the differential compresses back to 16%, and house prices are constant, that will see units lift to just under $800K. That’s a gain of 23%.
And my guess is that should happen in fairly short order, especially once the interest rate cycle turns.
So I think it’s a reasonable case to make – that units are currently 20% undervalued, and that they should make up that difference pretty quickly.
You’ll see.
JG.