The apartment market got left behind during Covid — now the pendulum is swinging back in its favour

Among the many dramatic outcomes from the Covid period was the huge jump in house prices relative to units — space was suddenly at an exorbitant premium.

For property buyers, units were branded inferior to the point some now believe they can no longer be seen as a stepping stone to the ownership of a stand-alone home.

But, just as units reach a low ebb in public estimation, the tide may be turning.

Units suddenly have a very different economic appeal for first time buyers when rents are rising in double digits and there is a vacancy rate of 1 per cent.

Let’s put it this way; when the queues for home sales are longer than the queues for residential rentals, it’s clearly time to take a closer look.

For homebuyers, it’s true the price gap between houses and units opened dramatically in recent years.

For investors, a similar dilemma appears — if house prices are in a different league, is investing in a unit a one-way ticket to nowhere?

The data backdrop is severe — the gap between units and homes almost doubled in recent years. In Sydney the ‘value gap ratio’ was 33 per cent before the pandemic, and today is more like 68 per cent.

The thing is, the valuation gap can change — it can narrow again — and there is evidence this has been happening in recent months.

Just as you read more stories about younger couples giving up on buying a home and ‘settling’ for an apartment or townhouse there is change happening, and it’s happening where all property trends begin — the inner city suburbs.

A report this week from the Nuestar group suggests: “Our analysis has found a growing trend of apartment markets outperforming house markets throughout Australia”.

Terry Ryder, founder of the Hotspotting research service, says the dynamics are changing for apartments, where investors are coming into the market for yield, while ‘downsizers’ are also creating a new stream of demand. According to Ryder, “The impact of downsizers cannot be underestimated”.

At CoreLogic, executive research director Tim Lawless has been looking at the issue and explains: “The gap between units and apartments got very large, but if you look at the most recent data that gap is steadying as the growth trajectory of units starts to outpace houses”.

We are now looking at a post-Covid market, and if the ‘Covid market’ was the period where stand-alone homes ran too high too fast, then this period may well see what economists call ‘a reversion to the mean’.

If you go back and look at the hard numbers since the pandemic, this is what happened: house values since March 2020 jumped by 37 per cent, while unit values rose by 13 per cent.

Now, the pendulum looks set to swing again. In the three months to March 31, Hobart was the only city which had stronger value growth in houses compared to units.

The focus then for home buyers — and investors — is what to buy and where? The markets offering the most promise are inner-city capital markets, particularly among established apartments where there is an element of scarcity compared to new development districts.

Until very recently the unit market is where investors have gone very wrong for the key reason of unlimited supply in some districts. In the city of Brisbane, where there has been a strong lift in prices across the board since Covid, it is still the case that one in twenty apartment investors lost money when they sold over the last year.

But, looking forward, the changing data is changing the game. As CoreLogic economist Kaytlin Ezzy put it in a recent note: “Given the worsening affordability environment and the growing possibility that interest rates could be higher for longer, it’s unsurprising that demand has skewed towards the more affordable unit sector”.

So don’t say units don’t get you on the property ladder — of course they do. For a homebuyer, they stand up very well against renting in an under-supplied market where property owners are going to have the upper hand for years to come.

The bigger question regarding whether they are a stepping stone to a stand-alone house may be answered by the fact apartments fell dramatically behind houses, and the period where the gap yawned dramatically is over. There are now strong signals units will have their day in the sun.

“Demand is now tilting towards unit and apartment living due to affordability concerns, particularly in capital cities,” Ms Ezzy said.

Every extra month the units outpace home price growth, the gap narrows. How will it last? The conditions are there for the trend to accelerate from here — though chances we will return to the 30 per cent ratio we knew pre-Covid are very slim indeed.

James Kirby hosts the twice weekly Money Puzzle podcast