Unit Prices Lag Behind, Leaving Investors Exposed

A predicted recovery in unit prices has not materialised, putting long-term apartment investors at a disadvantage. Stand-alone house values continue to rise, but many apartment sales are still delivering heavy losses, especially in Australia's largest cities. This highlights that while buying a house can help build wealth, investing in units can come with financial risk.

For years, many property experts expected apartments to catch up in value compared to houses, especially as rising prices forced more buyers to consider smaller, more affordable options. However, this rebound has yet to occur. Units, once seen as a lower-cost entry point into the market, continue to underperform. According to a report from Cotality, previously known as CoreLogic, this pattern is still playing out. During the March quarter, 63% of all properties sold at a loss were units.

The biggest losses are being seen in urban centres where most negatively geared investment properties are located. In Sydney, around 90% of all loss-making sales involved apartments. Melbourne is seeing similar trends, with over one in five unit sales leaving sellers worse off. Despite a national rental vacancy rate of just 1%, unit prices have not benefited.

Oversupply remains a major issue. Developers have filled inner-city areas with new off-the-plan apartments, which are now weighing down prices. Some Melbourne suburbs are experiencing market conditions not seen since the 1990s recession. This pressure is being made worse by high property taxes in Victoria. Following the interest rate cut in February, a wave of sales occurred as long-term owners rushed to offload underperforming apartments. On average, these properties had been held for 8.5 years.

When adjusted for inflation and mortgage costs, many unit investors have seen little or no real return. In many cases, this has meant a real loss. Over the last 10 years, house prices have increasedby around 80% while unit values have grown by only 38%. Much of this underperformance is concentrated in specific areas. Three Melbourne postcodes - Melbourne CBD, Port Philip and Stonnington, along with Parramatta in Sydney, account for about 20% of all unit resale losses.

There are, however, small signs of improvement. Some areas not heavily affected are beginning to show price growth in the unit sector. Analysts suggest that if the Reserve Bank makes more cuts to interest rates, the market may start to recover more broadly. For now, the outlook remains cautious.

Source: The Australian, KPMG Australia, Home Loan Experts