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Houses vs Units: what does the data say?

Thursday, 29th Oct 2020

One of the most common questions we get from buyers when starting or expanding their property portfolio is which type of property they should be investing in.

Both houses and units have their own unique benefits and drawbacks from an investment perspective. On top of this, your individual investment strategy, financial position and (importantly) the market in which you’re buying can all play a crucial role in determining which type of property is the better fit for your portfolio.

So, is there a clear-cut answer when it comes to which property type makes the better investment? And what can data tell us about their long-term potential?

Cost of entry

Generally speaking, house prices are higher than unit prices, and this initial cash outlay can be an important consideration for buyers looking to purchase an investment property. REIWA data from the Perth market shows that units sold for a median price of $370,000 during the third quarter of 2020, whilst houses were more expensive, with a median price of $475,000 over the same period.

Units offer a more affordable entry into the property market which may make it easier for first-time investors to begin their property journey, and they also offer opportunities for more seasoned investors to leverage their lower price point to quickly purchase additional properties in different areas. However, there are other key considerations you need to take into account when looking to purchase a unit that extend beyond the initial price point.

Rental yield vs capital gains: why you need to consider your strategy

Understanding your property investment goals is an important consideration when choosing between a house or a unit. Typically, property investors are either looking to increase their wealth through capital growth or use the property to generate an additional income stream through rent.

For property investors wanting to increase their wealth through capital gains, houses loom as the better choice of property as they have historically offered greater potential for growth. So why is this? When purchasing a house, land value makes up a greater portion of the value of that investment. This plays an important role in the property’s long-term growth, as it’s this land that can continue to grow in value over time, while the building itself depreciates. However, not all houses are equal, and it is important to consider the location you are intending to invest in. For instance, a house situated in a tightly held, established suburb in closer proximity to the CBD will often offer a higher land value component than a property situated on the outer fringes where the market is more oversupplied, and there may be additional stock coming on stream from new developments.

Unlike houses, units have a much smaller land component attached to them which can significantly limit the capital growth available. However, this also varies between locations and style of construction. For example, a unit or villa close to the CBD on a small strata lot (e.g. 200-300sqm) could have a higher land value (in real dollars and/or as a percentage of property value) than a new house and land package on the city’s suburban fringe. For investors looking to generate passive income, the rental yield of units have historically been seen as a more lucrative option. However, this is beginning to change with recent CoreLogic data showing that Perth house rents have grown 4.9% from March 31 to October 31 this year while unit rents have only risen 2.5%.

The price of ownership

Both houses and units have additional fees and levies that accompany each property type and contribute to the overall cost of ownership.

Maintenance costs are an inevitable aspect of property ownership, whether it be the general upkeep of the property or addressing unexpected repairs, so having a cash buffer on-hand to rectify these issues is always important.

Units aren’t exempt from ownership costs either and these come in the form of strata or body corporate fees, usually paid quarterly. Unit complexes that feature additional amenities like pools, gyms and communal areas will face increased strata fees that allow for the maintenance and repair of these features, which need to be factored into your holding costs when making a purchase decision.

 

What does the data say?

Regardless of which property type you purchase, a strong understanding of local market demand and supply factors, and careful property selection, are critical for ensuring the long-term success of any investment. So, what does this look like for Perth?

More units selling at a loss

CoreLogic’s Pain & Gain report analyses property transactions compared to their last transfer and provides insight into the percentage of loss-making vs gain-making sales. Results from the Perth market during the June quarter this year showed that 36.2% of sales incurred a loss, and while both houses and units have suffered price contractions in Perth’s soft market in the past few years, the extra supply faced by units hampers their price growth and resilience. This trend is consistent across Australia’s major housing markets, with the national average of loss-making sales for houses sitting at 10.4% compared with 20.7% for units.

Graph showing Perth stock for sale by dwelling type

Houses better poised for recovery

While houses have historically proved more resilient during downcycles, they have also been quicker to recoup loss and resume growth during a market recovery. REIWA data depicting the stock for sale within the Perth market highlights this disparity between the performance of houses and units. Stock for sale by property type shows the number of houses on the market has fallen considerably in 2020 in comparison to the levels of units and land for sale which have both only fallen marginally. This drop in the number of houses on the market results in higher buyer competition for available stock, which in turn places upwards pressure on property values – positive news for investors who own houses. In comparison, buyers continue to withdraw from the unit sales market leaving a surplus of properties available, especially within the Perth CBD. This oversupply will likely slowdown this recovery in these areas, limiting price growth over the long-term.

 

When choosing which type of investment property to purchase, the decision ultimately rests with the investor and the strategy and risk that they are willing to accept. The success of any property investment strategy relies on selecting a property that fits your needs and appetite, while also considering these needs in the context of the wider market in which you’re investing.

If you are looking to invest in the Perth market and would like to speak to one of our property experts about potential opportunities or the type of strategy suited to you, our team would be happy to discuss your investment needs in an obligation-free consultation.