The document provides a May 2015 property market update for Australia. It notes that the disparity between house and unit growth is widening, with Melbourne houses increasing 2.27% in value while units declined 0.08%. Sydney continues to lead quarterly growth at 3.18%, bringing the median house value to $929,000. Trend data shows divergence between houses and units in both Melbourne and Sydney, with units trending down to almost zero growth in Melbourne. The update cautions that continued investment in units may not be favorable, as houses have historically outperformed units and suffered less in market corrections.

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May Property Market Update
May
06
2015
Disparity Between House and Unit Growth Widens
by Eliza Owen
Market Analyst for Onthehouse.com.au
This month has seen a drastic change in Melbourne house growth, which shot up 2.27 per cent in March,
bringing the annual growth rate to 8.68 per cent.
Table 1 – Summary of Results for Major Cities as at March 2015
Sydney is still leading quarterly growth with a further 3.18 per cent expansion, bringing the median house
value to $929,000.
Graph 1 displays the monthly house and unit growth trends for both the Sydney and Melbourne markets
from March 2011.
Graph 1 – Sydney and Melbourne Growth Trends
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2. The trend data in the graph is slightly different to the data presented in Table 1 because it represents a
‘best fit line’ as a result of smoothing out the growth rates over time.
Note the divergence in the trend lines between Melbourne houses and units, represented by the dark blue
lines in Graph 1. From December 2014, the growth in value of Melbourne houses increased, while units
have been trending down to almost zero per cent. This is reaffirmed by the data in Table 1, which shows
Melbourne units declined 0.08 per cent in value last quarter.
Sydney properties are also displaying a larger divergence in growth for the two different dwelling types.
The current housing boom has really emphasised the idiosyncrasies of the two markets. Although units will
present as relatively affordable, it is clear they do not produce higher returns.
At the current rate of approvals, I would argue new units are a mal-investment of resources in the long
term. Developing dwellings for investors sees a higher incidence of unit development, which creates lower
living standards for tenants and more competition in the housing market for owner-occupiers, as less new
houses are developed. This is supported by the latest housing market survey from NAB, which shows a
majority of foreign investors purchased units (53 per cent), followed by houses (30 per cent) and land for
development (17 per cent) . While similar data was not available for domestic investors, units are most
appealing because they require low maintenance and are relatively affordable.
ABS approval data also shows the incidence of increased unit development along with investment. Graph
2 displays this data between 1995 and 2015.
Only twice in recorded history have approvals for units outstripped approvals for houses: September 2013
and January 2015.
Last month, John Edwards posed the question of whether people would prefer to live in a house or unit,
and assumed people would prefer a house and garden. I think this situation, where tenants, first home
buyers and low income earners are priced out of houses and into units, can be clouded by arguments
about a changing lifestyle of younger generations.
Perhaps people waiting longer to have children could explain entry into a unit as opposed to a house;
People may have more capacity to move into a unit before buying a house with no children to
accommodate. However, I found the median age of people having children was largely unchanged from 29
in 1995, to age 30 in 2015. Yet Graph 2 displays a significant upward trend of unit approvals in this period.
Graph 2 – Australia-wide Approvals
August 2013
July 2013
June 2013
May 2013
April 2013
March 2013
February 2013
January 2013
December 2012
November 2012
October 2012
September 2012
August 2012
July 2012
June 2012
May 2012
April 2012
March 2012
February 2012
January 2012
December 2011
November 2011
October 2011
September 2011
August 2011
July 2011
June 2011
May 2011
April 2011
March 2011
February 2011
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Another explanation could be the planning of our cities. Most of the entertainment, employment, cultural
activities and services are found in cities. Development in Sydney in particular has taken place in the form
of haphazardly planned dormitory suburbs. Consequently, pressure is placed on our roads and public
transport as people commute for hours from work to home. Trading in commute times for low
maintenance, conveniently located property could be another factor at play in the drive for units. This is
supported by population-weighted density figures, which have risen at higher rates in Sydney than any
other city. Population-weighted density increased approximately 15 per cent between 2000 and 2012.
However, I do believe that if Sydney was well-planned, this density may not be as severe. Australia has
ample space, and the technology is available to distribute resources widely. In spite of this, developers
have largely not yet sought to integrate new houses with work places, good transport, local industry and
ample entertainment facilities. If people recognise the importance of planning, then high density, low
quality units would likely become redundant.
It is understandable that investors have been tempted into the high returns of the Sydney property market.
However, I would say that continued investment in units is not favourable. Historically, houses have
outperformed units, and have suffered less in periods of correction. Well built houses on large blocks of
land will retain value because they come with land and present all sorts of potential for development,
extensions and spacious living.
A final consideration is the unusual volatility in this lengthy boom. Property is a long term investment that
has historically trended upwards, but the increase in the range of returns in the last 20 years suggests they
are becoming less safe.
To get a sense of how volatility has grown over the past two decades, we can consider the range of capital
growth values over time for Sydney metropolitan houses. For example, in the period 1990 to 1995, the
Sydney market saw losses of 1 per cent per annum and highs of 10 per cent per annum. The range of
returns in this period is 11 percentage points. Between 1995 and 2000, this range widened to 15
percentage points, and between 2000 and 2005 it widened further to 29 percentage points. Over the past
five years, the range of returns has remained at 23 percentage points with growth ranging between minus
3 per cent and 20 per cent. These sustained, higher ranges point to larger volatility in housing returns.
Furthermore, household debt is at record highs, and growth in the New South Wales and Victorian
economies are currently heavily reliant on continued construction of infrastructure and dwellings. Such
growth is not sustainable, and should be kept in mind as we cautiously move forward over the next few
months.
Eliza Owen,
Market Analyst for Onthehouse.com.au
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