Australian unit market update May 2022


key takeaways

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.

House Affordability

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%.

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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.


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