Rebound in apartment market fails to materialise leaving investors with long-term losses

Property investors with units in key areas of Melbourne and Sydney are selling for a loss, with some areas the worst since the deep recession of the 1990s.

In Melbourne more than one in five apartments have been sold at a loss.

A widely anticipated rebound in apartment prices has failed to materialise inside the property market. In fact, if you want to lose money then buying a unit remains the best way to do it.

After a striking surge in stand-alone home prices during the pandemic when house prices doubled the gains recorded by apartments, the gap in favour of houses has widened again.

Many forecasters had expected unit prices to catch up. But new figures suggest the humble unit remains very humble indeed.

A new report from the Cotality group (formerly CoreLogic) says there is “a persistent underperformance in the unit sector over the decade to March”.

Eliza Owen of Cotality suggests: “What we are seeing is a re-acceleration in the outperformance of house, which must be frustrating for unit investors.”

Put simply, the majority of all properties in the March quarter that sold for a loss – 63 per cent – were units.

Worse still, the black spots are in major cities where most everyday investors place their interests – often using negative gearing to finance their investments. Around 90 per cent of all loss-making sales in Sydney are apartments.

Meanwhile, in Melbourne, more than one in five apartments have been sold at a loss.

What’s happening? In a word, oversupply. Property developers have swamped key suburbs with off-the-plan projects that offer a low cost entry point into the market. That’s why the ongoing rock bottom rental vacancy rate of 1 per cent has not helped unit prices turn the corner.

At it’s worst – where there is a combination of oversupply and high property taxes – such as in Victoria, the numbers become abysmal. The figures this year for Melbourne are the worst recorded since the deep recession in the state that hit more than three decades ago in the 1990s.

The other key factor is that investors are selling at the slightest prospect of opportunity.

The first rate cut this year back in February prompted a wave of selling into the market. Many of those sellers had held loss-making apartments for a long time – the median hold period on units sold at a loss was 8½ years.

Allowing for inflation – not to mention mortgage servicing costs – this means property investment for many unit investors has been a complete failure.

Over the last decade stand alone homes have literally done twice as well as units – rising 80 per cent against 38 per cent.

A closer look at the numbers reveals that a significant drag on the wider unit numbers comes from just four areas, which account for around 20 per cent of unit losses, and three of these areas are in Melbourne: Melbourne city, Port Philip and Stonnington. The fourth is Parramatta in Sydney.

Outside of the black spots of central Melbourne and Sydney, there has been a very recent uptick in unit prices in some suburbs with analysts expecting profitability to improve in all corners of the market if the RBA continues to cut interest rates.

In the overall market, 95 per cent of all property resales delivered a profit, representing about 86,000 resales in the March quarter, where the median nominal gain was $305,000, down from $310,000