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Key takeaways
The price differential between units (apartments) and houses is at historic highs.
With rising interest rates likely to worsen serviceability, it is possible that demand will shift from the lower density sector (houses) to the unit segment as buyers look for a more affordable option.
The strong unit rental growth is being supported by record-low vacancy rates.
Unit yields are beginning to recover from their recent lows.
Total listings levels in the combined regional unit market also remain low, helping bolster the strong growth seen across regional Australia.
What’s really happening with the unit (apartment) market’s around Australia?
And what’s likely to happen to the house price / apartment price differential moving forward in a period of rising interest rates?
Of course we know that on March 3rd the RBA announced a 25-basis point rise to the cash rate, the first cash rate rise since November 2010.
This rise came off the back of a headline inflation reading of 5.1% in March, the largest annual inflation rate since June 2001 (6.1%).
With continued supply chain shortages, a tight labour market, and inflation that is expected to remain high, the RBA has suggested that multiple rate hikes will be required to bring core inflation into its target range of 2-3%, with most experts expecting the cash rate to rise by 1-2 percentage points by the end of 2023.
Higher cash rates will add further downward pressure on dwelling values, adding to the loss of momentum seen over recent months.
Affordability continues to be an important factor affecting market conditions.
While further cash rate rises are expected to put further downwards pressure on values, the increase in affordability caused by lower values could be partially or entirely offset by the increase in monthly mortgage repayments caused by higher interest rates.
A decline in dwelling values and rising interest rates
A recent analysis of housing affordability undertaken by CoreLogic and ANU using March values suggests that a 10% fall in dwelling values, coupled with a 2.25% rise in interest rates would see monthly repayments on a new mortgage with a 20% deposit increase by $439 and by $521 for those using a 5% deposit.
The same research found that as of March 2022, the average capital city house required 46.3% of the average household income to service the typical mortgage, while capital city units required 32.2%.
With rising interest rates likely to worsen serviceability, it is possible that demand will shift from the lower density sector to the unit segment as buyers look for a more affordable option.
At the national level, value appreciation slowed by 10 basis points in April across both houses (0.7%) and units (0.2%).
This slowing in the monthly growth rate has seen the annual appreciation in national unit values fall to 10.4%, while the annual growth in national house values fell below 20% for the first time since July 2021 (18.4%) to 18.6%, resulting in an annual performance gap of 8.2%.
While monthly value changes are still positive across both housing segments at the national level, growth conditions are more diverse amongst the individual capitals and regional markets.
Over the three months to April, unit values across the combined capitals rose 0.2%, compared to the 1.3% rise recorded for houses.
Brisbane leading the capital cities in growth
Making up 38.6% of the capital city unit market, the – 1.2% decrease in Sydney’s unit values weighed heavily on the combined capitals growth metric, with all other capitals reporting quarterly growth above or in line with the combined capitals.
Brisbane (4.6%) led the pace of quarterly growth, recording its highest quarterly growth rate since January 2008 (4.9%), followed by Adelaide (4.3%) and Canberra (3.8%).
Across Perth and Melbourne, unit appreciation appears to be regaining some steam with Melbourne units recording a 0.4% increase in values over April, resulting in Melbourne’s first positive quarterly growth rate since January, while Perth’s quarterly growth rate has recovered from 0.0% over the three months to January to 1.0% over the three months to April.
Hobart’s unit values rose 0.6% over the month of April, while Darwin’s values rose 0.2% over the same period.
Regional houses (1.4%) continued to outperform regional units (1.0%) in April, with the pace of growth easing across both segments from the 1.7% rise seen in March.
Following a similar trend to the capital, Regional QLD led the pace of quarterly growth, recording a new cyclical high of 6.3%, followed by regional WA (3.6%), regional Tasmania (2.8%), and regional NSW (2.7%).
While value growth across most unit and house markets is now losing momentum, Brisbane and Regional QLD units are yet to show signs of a slowdown in growth.
Listings continue to help explain some of the divergences amongst the capitals.
Total unit listings levels in Brisbane and Adelaide remain approximately 40% below the previous five-year average despite the newly advertised unit listings having somewhat normalised over recent months.
At the other end of the spectrum, Sydney and Melbourne’s total advertised unit supply is now between 8% and 17% above the average, suggesting that more units are being added to the market than are being sold.
Total listings levels in the combined regional unit market also remain low, helping bolster the strong growth seen across regional Australia.
Continuing the trend seen over recent months, rent values for national units rose at a faster pace than house values, with unit rents rising 3.1% over the three months to April compared to a 0.8% rise in values.
The monthly rise in national unit rents (1.0%) outpaced the rise in house rents (0.9%) for the fourth consecutive month, with unit rents now growing faster than house rents on a quarterly basis.
Affordability pressure has likely aided the shift in rental demand towards the higher density sector, with units being seen as the ‘cheaper’ option, as well as increased rental demand thanks to the return of overseas migration.
Adelaide and regional WA led the pace for unit rental growth, both rising 1.4% over the month of April.
This was followed by Melbourne, Perth, regional QLD, and Sydney, which saw unit rents rise by 1.2%, 1.1%, 1.1%, and 1.0% respectively.
At the other end of the spectrum, regional South Australia (- 0.2%) recorded a fall in unit rents over April, while Darwin’s rents rose by 0.1% after decreasing -0.6% over the month of March.
The strong unit rental growth is being supported by record-low vacancy rates.
Nationally, just 1.5% of units were observed as vacant over the month of April, down from a cyclical peak of 5.0% in May 2020.
In April, the combined capital city unit market recorded its lowest vacancy rate since March 2005 (1.3%) with 1.6% of units observed as vacant, while units across the regional areas recorded the lowest vacancy rate since CoreLogic records commenced in August 2003 at 1.0%.
With strong rental growth consistently outpacing value appreciation, the national gross rental yield for units has risen for the fourth consecutive month to 3.76%.
Across the capitals, Darwin continues to return the strongest unit yield (6.62%) despite yields falling four basis points over the month, followed by Perth (5.49%) and Adelaide (4.95%).
Recovering from an all-time low of 2.99% in December, Sydney’s unit yields are now 16 basis points higher at 3.15%, while Melbourne’s yields are now above the yields recorded this time last year (3.53%) at 3.60%.
With the cash rate already on the rise, consumer sentiment continuing to trend downwards, and worsening affordability constraints impending demand, the outlook for the Australian housing market continues to inch towards a downturn.
While less volatile than the lower density sector, Australia’s unit market is not immune to these downside risks with signs of easing growth now apparent across most unit markets (with the exception of Brisbane and regional QLD).
Moving forward, a number of factors will likely help insulate the lower density sector including increased overseas migration, the relative affordability of units compared to the housing segment, as well as the recent upswing in new investor financing seen in February and March.
Additionally, unit yields are beginning to recover from their recent lows.
Across the combined capitals, unit rental growth (3.1%) outpaced capital appreciation (0.2%) over the three months to April, with both metrics recording an annual rise of 8.3%.
If rental growth continues to outpace capital gains, increasing rental yields should help incentivise investors who typically prefer the lower maintained unit segment.
Editor’s note: the present report was prepared with the help of Kaytlin Ezzy, Research Analyst at CoreLogic.
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