Record new unit supply is likely to contribute to the underperformance of unit values: Cameron Kusher
GUEST OBSERVER
With a record-high number of units currently under construction nationwide, the capital growth performance of units is weaker than houses in certain cities and we anticipate that this trend will continue.
The CoreLogic Home Value Index shows that over the 12 months to August 2016, combined capital city house values have increased by 7.2 percent compared to a 5.5 percent rise in unit values.
Rolling annual change in house and unit values, combined capital cities
The first chart shows the annual change in combined capital city house and unit values over time. The chart shows that typically the change in house values is greater than units. What is interesting though is that during the past two instances of value declines nationally, house values have actually recorded greater annual falls than units.
While the rate of annual growth for units has been only slightly lower than that of houses across the combined capital cities, across individual cities the trends vary significantly. Hobart and Darwin are the only two capital cities in which the change in unit values over the past year has been greater than the change in house values.
Annual change in individual capital city house and unit values 12 months to August 2016
In Melbourne, Brisbane, Adelaide and Canberra, the change in unit values over the past year has been less than half that of houses. This in itself is interesting, particularly when you consider that Melbourne and Brisbane in particular are currently experiencing historic high levels of new unit construction. The fact that in many of these cities substantial increases in unit stock is expected over the coming years, it is reasonable to anticipate that the gap between the annual change in house and unit value will persist and potentially grow larger.
Taking a longer-term look at the change in house and unit values since December 2008 shows clearly that overall value growth has been much stronger in Sydney and Melbourne than anywhere else. Over the period, both house and unit values are higher across each capital city however, houses have outperformed units in all cities except Hobart and Darwin. In Brisbane, Adelaide, Perth and Canberra, the cumulative growth in unit values has been less than half that of houses over the period.
Total change in house and unit values, December 2008 to August 2016
The data shows that we’re already seeing the growth in unit values generally underperforming houses values. Of course, over recent years the overall supply of units, particularly in inner city areas has increased substantially with even more new stock to come. The most recent data from the Australian Bureau of Statistics (ABS) showed that nationally there were 152,449 units under construction at the end of the March 2016 with an additional 41,548 units approved for construction to July 2016, many of which would have already commenced construction.
While demand for inner-city housing, particularly units, has increased significantly over recent years the heightened level of unit construction has the potential to create problems for the housing market. While an increase in housing supply is important, much of the new unit stock to-date has been targeted at an investor market. From an investors perspective units offer higher yields and lower prices than houses however, in many cities recent growth has underperformed while the rental market is the weakest it has been in more than two decades. With additional unit stock under construction, there is the potential as this stock enters the market the rental market will become even more depressed.
Quarterly number of houses and units under construction, National
Over the coming years we anticipate that the performance of houses and units could diverge even further. While units offer a much more affordable purchase price than houses, as the supply of units relative to houses increases, we would expect demand for detached houses to hold-up much better than demand for units. Especially considering much of the new unit stock has to-date been one or two bedrooms, of a similar internal size and design and very much targeted at a similar market segment.
For those people who are looking to purchase a unit at a time when supply levels are moving through record highs, projects which are differentiated from the broader market, based on their location, design, owner mix or quality of the developer may provide some safe haven from the weaker unit market conditions.
Cameron Kusher is research analyst for CoreLogic. You can contact him here.