Are Units As Safe As Houses?
Not long ago, when the Great Australian Dream was to own a house, units were sometimes considered as second-class accommodation options; the preferred domain of the ‘downsizer’, or for those who could only afford a watered-down version of the ‘full’ dream.
Times have well and truly changed though, as evidenced by Tim Lawless from CoreLogic noting in their March Hedonic Home Value Index that “The unit sector across Sydney and Melbourne has shown stronger conditions relative to detached housing.”
When I asked my Property Protégé Group why units might be performing better than houses, even despite a pending potential glut of new units that are forecast to hit the market over the next year or so, they correctly identified these realities:
Affordability
If you don’t want to rent, but you can’t afford a house in the area you want to live in, what do you do?
You compromise by resetting your expectations. Sure, while it would be nice to own a home, if it is simply not financially feasible (i.e. insufficient deposit and or borrowing ability), or the debt obligation not wanted (i.e. preference for less debt but more life), then the compromise is no longer seen as an unpleasant ‘second choice’, but rather a prudent decision.
Convenience
The classic home on a quarter acre block of land used to be the goal. Not any longer. That slab of land requires too much maintenance and upkeep – weeding the garden, mowing, and if you are unlucky enough to have a pool (once something that made you the coolest kid in primary school), then you are accursed in having to not only regularly scoop out the leaves and clean it, but to also pay a small fortune in keeping it clear and blue, when nature wants it to turn murky and green.
A unit, on the other hand, is compact and convenient meaning the private open space is easier to maintain. If more space is needed, then there are many local parks to choose from – all of which are well looked after (and paid for) by the local council.
With the tendency for units to be built in large numbers in those suburbs close to CBD’s, choosing to buy a unit there can save some serious coin in travel costs going to work. If one didn’t want to drive the now much shorter distance to work, the infrastructure is often already in place to use heavy rail on a daily basis, saving lots in running costs and the parking of a vehicle near your workplace.
Space
Less is the new more. It was previously mandatory to have a ‘spare bedroom’ on the off-chance someone came to stay, but more often these spaces became a sort of ‘urban self-storage’ and a place to dump stuff. Not anymore.
A vacant room adds a lot of mortgage cost for not much living benefit. Unexpected visitors can now find a friendly patch of carpet to unfurl their blow-up mattress, or even better, stay at the local Quest apartments (or AirBnB, or even couch surf).
Expectation
In addition to their skill and money, the recent influx of overseas immigrants and overseas investors have brought with them new ways of thinking too. One such idea is that living in an apartment is not second class at all, but rather mainstream and normal. While it might take a generation or two for the idea to embed into the community as a whole, there are nonetheless many active buyers whose Great Australian Dream was just to live here, and anything they can call their own is a real blessing.
- Concept Gentrification
Concept GentrificationThe inability to own a home and having to settle for a unit is no longer just for a few hapless unmarried or elderly folk. Nowadays, the inability to afford a home is a mainstream issue affecting many (particularly those under 30), and this has had the effect of legitimising units as the new normal, and reclassifying home ownership as something that only the elite can afford. This could lead to some interesting ‘tax targeting’ in the future as the voting block of those owning homes dwindles.
The Future Of Houses
What are the consequences for houses that are becoming less attractive and affordable? Specifically, as baby boomers retire and downsize (to units) in increasing numbers, with the decline of international buyers, what new demographic can afford (or will want) to pay top dollar for what is becoming an obsolete form of accommodation?
Investor Response
It is indisputable that the unit (more accurately described as “dwellings other than detached houses”) sector is increasing in numbers and popularity. While I’d continue recommending shying away from new units sold off the plan (owing to a potential lack of scarcity and because much like a new car, new units tend to fall in value immediately after first use), there is definitely opportunity for those who want to buy (for scarcity) and hold, renovate, or even possibly creatively subdivide (i.e. buy the block and sell the unit, or some kind of strata subdivision).
Conclusion
As demographics change over time, this leads to a re-framing of so-called ‘normal’ desires and expectations. Consider the needs and tastes of one hundred years ago (when horses and carts were phasing out) to today (when owning any kind of car is becoming normal). Naturally, society’s changing tastes will shape what’s hot (and cold) in the property market. Our job as investors is not to pass judgement on their legitimacy, but rather to supply what is in demand, because so long as people live in houses (or units) you can make money by buying problems and selling solutions.
How have your investing attitudes changed with the times? What ‘old style’ philosophies and prejudices might be a disguise for investing dogmas that are causing you to overlook profitable opportunities?
Have your say on this topic by leaving a comment below.
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I never thought I’d see the day you would be suggesting to buy units Steve but it makes sense.
LOL
It’s your generation Jase for whom house ownership is increasingly unaffordable, and hence units are a more realistic option.
– Steve
We ( Nicola and I) have just done the unthinkable!
We have put a deposit down on a 2 bedroom off the plan unit.
We did research. We visited the proposed site.
We checked the developers and their builders credentials. They have a relationship that spans over 20 years.
We bought through a group that have their own R&D department.
The unit will not be able to be built out. The Maranong River is less than 100 m away. Cycling paths to the City.
The train takes 10 min. The complex houses a Business Centre, Green Grocer, 20-30 seat Cinema, a low cost Swimming Pool…low cost because a personal trainer gets use of the Gym in return for looking after the Pool and Gym…Win Win! Function Centre on a all residents accessible Podium Level. All these facilities can be used or booked by the residents. The proposed Strata Cost are very reasonable too.
Great Views over the Race Course and/ or the City.
It all convinced us that this is the future.
My gut also agreed!
Developments like that ( there are more incredible places already built and/ or happening!) will become the trend…that is what we believe anyhow.
In Victoria one can change the entity on the contract once without extra Stamp Duty charge.
The Stamp Duty and the within a group buy are our escape hatches … If things were to go pear shaped!
I always said units are not the right thing to buy.
Well these last couple of possibilities certainly changed our minds.
Happy Investing Everybody!
Well done!
– Steve
I agree with you on the point of Affordability.
We bought a small house in Newcastle inner suburb recently. I found out houses under $650,000 went off the shelves like hot cakes while those with a price range of 700,000 to 900,000 have far less competition. Although the prestige houses over 1.5 million can still find buyer easily.
Ok, some interesting points.
Having lived in Nairobi, Beijing, Kathmandu & Delhi, I can only slightly agree. People from those parts are escaping to Australia for more room and less crowd.
Thanks Peter. From what I understand, “small” here is “medium sized”, over there.
– Steve
Hi Steve,
It is surprising to see the units are becoming the hot cakes of the day!!!
Who would have thought units are in greater demand than houses. Having said that, it is very true that the price for a house in Sydney is well more than the units.
In terms of affordability and return on investment, units are becoming more popular. We can see a lot of unit blocks being developed in the beachside suburbs as the houses in these beachside suburbs are only for people with VERY DEEP pocket.
A lot of new migrants who are not used to live in a house and they may feel more comfortable to live in a unit block than in a house. Besides, the maintenance cost for a house is generally higher than the units.
It would be interesting to see how the trend is going?
It is a great article and thanks for sharing.
Very good point about the Maintainence Steve, another point I feel is good is that cause we are spending more and more time in our offices as well as other workplaces and therefore are probably looking to spend less time on the day to day tasks too such as internal cleaning etc, also as they become ubiquitous through society demand will increase and they will only become increasingly popular and eventually the complete norm, who knows….. I am now even more confident about my 2016 purchase hehehehe thanks for information/thoughts.
You really need to investigate the Body Corporate. Some of these units have massive admin costs. Older, smaller and usually ugly (but that can be changed) blocks have far lower costs. Also, number if units on block. If there’s six in the block you’re probably getting better land value than a block of 16
Indeed. Due diligence is always needed. Thanks for the post.
– Steve
True just be careful there is already a healthy sinking fund in place. The first place I purchased , for $49,000 had no sinking fund. So as a young 22 year old who paid all his savings as a deposit you can imagine my horror at having to fork out $2,500 for upgrades to the roof and common areas.
Thanks Steve,
As an investor I love reading and learning from those who have the runs on the board, I must say that I do like houses with yards as I see opportunity. Opportunity to either sub divide, add a granny flat and increase cash flow and capital, however as you have stated it’s about supplying and meeting the demand in relation to the demographics. I’m not against units but all in all, due diligence, due diligence, due diligence.
I agree! I think houses hold lots of opportunity, but the point I wanted to make in the articles is that units are becoming more and more popular.
– Steve
Hi Steve, is it fair to say your generalising in this post? And apart from Sydney, every other market in Australia & the data doesn’t really support this. Obviously there’s markets within markets nationally & I’m Interested to hear your thoughts on Brisbane, Perth, and to a lesser extent Melbourne – given the supply issue and many approvals in the pipeline in Brisbane, it’s absolutely a buyers market with Unit medians decreasing. Melbourne lesser given the population increase taking up a lot of the supply. Until it’s forced & more widely excepted around other states, the data is still favouring land.
Hi Codie,
I’m not sure you have picked up on the gist of my article. Nowhere do I say that units, or houses for that matter, in and of themselves, make good investments. As for cities, you would need to revert back to my recent analysis for those I regard as having ‘tailwind’ and ‘headwind’ conditions.
My goal in the article is to help readers to see that a trend is emerging, one I expect will continue, that normalises unit ownership. As investors, if we can pick up on trends and exploit inefficiencies, then we can make profits.
Regards,
– Steve
Having recently sold my unit (in a 6 pack) in Brisbane, Paddington near transport, shops, cinema etc was a wonderful location and home, however due to the Committee of the Body Corporate making decisions not in the collective interest of all owners and goodwill of neighbours, placed the Committee in an unworkable situation with minority views and control which eventually led me to selling.
Please perform due diligence on the Body Corporate (Strata) carefully, meet the committee and examine AGM & Committee minutes carefully. Check if the Body Corporate is being controlled by a minority of lots.
Importantly ask if anyone on the Committee has a conflict of interest i.e. is related to the builder or developer and holds an executive position on the Committee.
Great contribution Jules. Thanks for making it.
– Steve
HI steve,
Great article, I would like to buy a house but they are expensive, I have 3 units off the plan and all three have gone up around 20-25% with 5.5-6.5% cashflow positive. Strong demand in desirable locations.
I think the long term should be quite strong for units, I agree you have to be very careful which unit you buy though.