It’s been a raging debate between investors for many years – which is the smartest investment: houses or units? So let’s run through the pros and cons of each.
Units require less maintenance and a lower deposit.
Units - the pros
As a nation we’re becoming very cosmopolitan. Many people want to live near cities to be nearer to work, cafes and restaurants. According to the ABS, single person households are projected to sharply increase over the next decade. Obviously units are practical for single householders.
Units usually need less individual care and maintenance than houses. They’re looked after by the body corporate. Houses require not only careful building maintenance but the surrounding land may need attention too.
In many cases, units are cheaper to buy than a house. This means an investor needs less of a deposit and so the entry point is lower.
Melbourne has already had a glut of units in the last few years and is predicted to have continuing oversupply for the next few years.
Units – the cons
You’ll see unit oversupply occur frequently. This is due to the dynamics of unit construction. There’s a time lag between the demand of units and the actual approvals and then the building. What can happen is that the demand has gone down or been satiated and then all of a sudden six new unit blocks go up. This leads to a rental drop which then affects mortgage payments. Melbourne has already had a glut of units in the last few years and is predicted to have continuing oversupply for the next few years.
Macquarie Bank has tightened up lending for units as concerns about oversupply continue. It’s very rare for there to be a housing oversupply as houses are individual living spaces that don’t appear on the market at the same time.
Size can be an issue
It’s harder to get a loan from major lenders for smaller studio units. In addition many mortgage insurers won’t take on any property that’s less than 40 square meters. Without the mortgage insurance investors have to cough up a bigger slice of the deposit, sometimes 20 per cent.
You have complete control over a house and its land. You can bulldoze it down and convert it into a two separate houses that reap a double income. Or you can make major value adding renovations like adding a second storey or extra bedrooms. There’s a myriad of possibilities. However, with a unit you have less scope to do critical changes if the market is bottoming out. All you can do are minimal renovations as any structural changes will need body corporate approval.
As an investor you’re fairly straitjacketed by strata fees and these eat into your rental yield. You’re also at the mercy of unexpected levies and special taxes. As a house owner you can, within reason, pick your time to do important renovations.
All buildings depreciate over time. That gleaming, modern new unit building you bought into will be worth less in a year’s time. There’s no way to stop wear and tear and ageing. Conversely land always appreciates, but as a unit investor you don’t own the land, only a single unit.
With a house, you’re getting the valuable ownership of land.
Houses – the pros
With a house you’re not just buying the building, you’re getting the valuable ownership of land. So whilst the building itself attracts capital gain, so does the land. As mentioned earlier, land always appreciates which offsets any loss from building depreciation. Finally, land gives you a security you don’t get from units. Unless Australia’s east coast gets destroyed in a tsunami, it's unlikely land will go down.
That’s a staggering difference of $1.76 million* in favour of the house.
Higher capital gain
All the data shows that generally, houses accrue greater long term capital gain than units. For example, a unit in Sydney’s desirable Bondi Beach back in 1993 sold for $257,000. A house nearby in the same year sold for $387,000. Today the unit is worth $1,050,700, while the house is worth $2,812,900. That’s a staggering difference of $1.76 million* in favour of the house.
Just look at the figures for the last quarter to December 2016. The median Sydney house prices were $1.1 million while the median unit prices were $711,000. Sydney house prices have consistently increased in the last 20 years going from $217,686 in March 1996 as a median house price to $1.1 million by December 2016. Contrast that with units where the median prices have gone from $173,413 to $711,257 by December 2016. That’s a fairly striking contrast.
One of the problems with unit investment can be when you buy into a cookie cutter style skyscraper. These can be purely functional and at times fairly bland. You’re limited in what you can do with these kinds of units to make them attractive. On the other hand, with a house you can hire an architect to create a stylish and appealing look. Or alternately if the house you’ve bought is a wrecker you can knock it down and build a chic and elegant new home. This greatly increases the overall capital gain and also means you can charge higher rent.
Regional house growth
There’s been a real sea change in Australia over the last ten years with more people living in units in the city as they can’t afford houses. Then, as people start having families and want more space they’ve moved out further. This has led to places like Newcastle in NSW or Springfield in Queensland becoming major hubs with booming residential growth. Areas like Geelong or Wollongong, which were struggling ten years ago, are now excellent areas to invest in.
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Houses – the cons
Houses can incur more costs for maintenance than units, especially if you’re buying an older building with a lot of wear and tear. You’re also responsible for the grounds, garden and maybe even a swimming pool. However this can be negated if you’ve built a new house on land. In which case you’ll have minimal repairs to make and also you’ll qualify for depreciation tax breaks.
Houses usually require bigger deposits than units, though this is very area dependent. In fact, a house in a fast price rising part of Wollongong is more affordable than a unit in Sydney’s genteel Point Piper. As with any investment, there are always alternative ways to break in. So if you have your heart set on a house with good capital growth but can’t quite afford the deposit, consider using a family pledge loan or else teaming up with family or friends to form a cartel. Or consult with a broker, as there are always more options than you may think.
The data clearly shows that houses deliver the best long-term returns.
So - houses or units? As with any property investment there’s going to be lots of caveats.
Firstly, you could buy a wonderful house in a sluggish growth area and experience very poor rental yield and inadequate capital growth. Equally you could purchase a beautiful investment unit off the plan, only to discover that another twenty unit blocks are going up in the same area. You’ll be struggling to make any rental income and get no capital growth.
As always, research is critical. Remember that while we talk about median prices, there isn’t just one property market, but many. And that each market around Australia has its own set of peculiarities that you need to study carefully if you want to buy into. The data clearly shows that houses deliver the best long-term returns. With houses you can get the double sugar hit of positive rental yield along with strong capital growth – if you select the right house and area. Houses give you the stable security of land and that’s unlikely to go down in value. You have far more scope for security and flexibility to renovate or rebuild.