Australia’s unit market is set to be supported by several tailwinds over the year as the overall property market navigates the worst of the current downturn.
CoreLogic’s latest report showed how the unit market had a two-act performance in 2022: over the first four months of the year, there was an easing in the monthly growth rate, resulting in a modest 1.1% gain between December 2021 and April 2022.
The second act played out in May, when the successive rate hikes, low consumer confidence, and high inflation started to impact the market. These factors resulted in a downward pressure on values for units, falling 5.2% below their peak.
While both unit and detached housing markets followed a similar pattern, it is worth noting how units has maintained its resilience relative to houses.
CoreLogic economist Kaytlin Ezzy said units lost, on average, $32,400 during the current downturn from May to December — this is less than half of the $73,000 value houses lost during the period.
“Historically, house values have been more volatile than units, recording larger gains through the upswing and larger depreciation during a downswing,” she said.
“As the downturn matures, the resilience of the unit market has now become evident in the annual growth trend, with the annual performance gap between house and unit values inverting for the first time since May 2020 in November and widening further in December.”
Affordability helps cushion the downfall
Affordability continues to be a huge factor behind the unit market’s slower pace of decline relative to houses.
At just under $600,000, the national median value for units is approximately $170,000 cheaper compared to the average house.
Across the combined capitals, the gap is wider, at around $247,000.
“With eight consecutive rate rises reducing the average borrowing capacity by around 13.3%, it's likely a number of prospective buyers can no longer borrow the amount required to purchase a house and are instead looking towards the unit market as a more affordable option,” Ms Ezzy said.
However, there is no denying that the market still felt the impact from the tightening cycle.
In fact, the average household income required to service a unit mortgage increased from 30% in September 2021 to 35.8% in September 2022.
"Assuming the November and December rises are passed on in full, the monthly mortgage repayment on a typical unit will have increased by $614, despite the mortgage principle decreasing by approximately $26,000,” Ms Ezzy said.
Tailwinds for the unit market
While the outlook for the unit market this year is leaning on the negative side, a number of tailwinds should continue to support unit market amid the worst of the downturn, including relative affordability, low supply levels, and the return of investors.
"As units approach the floor in values, the prospect of medium to long term capital gains, coupled with strong rental returns, could entice more investors,” Ms Ezzy said.
The recent introduction of the land tax option in NSW is also a good tailwind for the unit market.
"The introduction of the land tax as a stamp duty alternative for NSW first home buyers could see more demand shift towards the medium to high-density segment as younger buyers look to satisfy their short-term needs,” Ms Ezzy said.
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