While Australia’s unit market is typically more resilient to a market downturn than detached homes, it is still evident that the current conditions are taking a toll on the segment’s growth.
According to CoreLogic’s latest market update, the national unit index has decreased 2.4% since peaking in April, which means that the unit segment has lost around $14,400 in value over the past four months.
CoreLogic economist Kaytlin Ezzy said one of the biggest drivers of the unit price decline was the accelerating reductions in the official cash rate.
“The current tightening cycle has seen the cash rate rise 2.25% in just five months, the fastest increases seen since 1994,” she said.
“While Australia’s unit market has been somewhat more resilient to falling values than the detached housing segment, it has not been immune, with many households being sensitive to increased interest rates due to high debt levels along with high inflation.”
With the current market conditions, here are three trends that continues to unfold in the unit segment:
1. Declines worsening in capital cities more than in regional areas
CoreLogic figures show that the combined capital city decline since April is worse in capital cities at 2.7% or $17,500.
In contrast, regional unit markets only posted a decline of 1.3% during the period, equivalent to a fall of $7,000.
On a monthly basis, capital cities registered a 0.9% decline in unit values in August, this takes the current downswing at its fastest in the past 40 years, overtaking the pace of decline seen since the onset of the Global Financial Crisis (GFC).
“Despite the current decline being the fastest on record, it’s important to remember the context of the past two years — while capital city unit values are just 0.5% higher than this time last year, they are still 7.7% above pre-COVID levels,” Ms Ezzy said.
Of all capital cities, Hobart and Sydney posted the largest monthly declines in unit values at 1.7% and 1.5% respectively.
Melbourne, another big market for units, also recorded a decline at 0.6%.
The downturn in unit values actually started in Sydney and Melbourne, which is typical given how big their markets are and how prone they are to changing conditions.
However, declines are starting to become more widespread — even Canberra and Brisbane slowed down.
Ms Ezzy said listings remain a huge factor that influences where prices would go.
“Limited supply across Adelaide has helped support value growth while above average listing levels in Sydney and Melbourne have contributed to skewing selling conditions in favour of buyers,” she said.
It is interesting to note, however, that listings levels across combined capitals have held steady over the four-week period ending 28 August.
“As we move further into spring, we would typically expect to see a rise in freshly advertised stock. If a rise in listings isn’t met with a subsequent rise in demand we could see a glut in supply, which would add additional downward pressure on values,” Ms Ezzy said.
2. Growth in rental rents surpasses capital gains
Another trend unfolding due to the current market conditions is the surge in unit rents, which outpace the growth in gains.
In August, only the regional markets of South Australia and Tasmania saw a drop in rents.
Overall, national unit rents grew across reference periods — up 1.1% monthly, 3.6% quarterly, and 11.2% annually.
These gains were due to the continued tightening in the rental market, with vacancy rates shrinking to 1.3% as of recently.
“A number of factors help create the current rental climate, including a decrease in the average rental household size, below average investor participation through 2020 and 2021, and relatively low levels of building activity across the medium to high-density sector since 2015,” Ms Ezzy said.
“Additionally, we are seeing a larger that average proportion of listings coming to market where the owner is an investor, which is likely to be another factor keeping rental supply so tight.”
3. Rental yields are surging
With rents outpacing capital gains, a surge in rental yields follow.
National gross rental yields rose to 4.07% in August, with Darwin having the highest yield at 6.96%, followed by Perth (5.63%), Adelaide (4.98%), and Canberra (4.95%).
Yields across Sydney (3.53%) and Melbourne (3.92%) was able to exceed the levels last year, while yields across Brisbane (4.84%) and Hobart (4.23%) are still below the levels record a year ago.
Amid these trends, the outlook for the unit market remains skewed to the downside, especially given the expectations of further rate increases over the remaining months of 2022 and into 2023.
“While the labour market remains strong and consumer sentiment has seen a small uptick in September, the outlook for values remains intrinsically linked to interest rates, with the trajectory of values dependent on how fast and far the cash rate rises,” Ms Ezzy said.
“Additionally, as we move further into the spring selling season, it’s possible higher unit listings could add further downwards pressure on values, if the seasonal rise in advertised stock is not met with a subsequent rise in demand.”
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Photo by Nicolas Postiglioni from Pexels.
