Units outperformed houses in 2024

Posted by Gavin Chau

As an investor and an analyst, I’m pretty much always living 18 months in the future, the exact opposite of the self-help advice to ‘live in the present’ and ‘the future and past don’t exist.’ This is just the nature of the work. In my 20s and 30s, finding ways to forecast the probability of something happening was an obsession of mine, but it’s almost impossible to predict both timing and magnitude simultaneously. You can typically do one or the other, but not both.

As predicted in last year’s State of Play, we saw a clear sector rotation from houses to units and properties in the upper quartile to the lower quartile, as well as regional outperforming capital cities. This is typically the pattern you see as the property market progresses and growth ripples out from higher-priced properties to lower-priced ones.

Except this time, it was accelerated by interest rates and affordability constraints, as the central banks tried to reign in the inflation they had created with overly loose monetary policy during the pandemic. We should see some of this pattern reverse a little over the course of this year as rates drop and affordability levels rise, but this cyclical pattern is likely a smaller wave of a larger secular pattern of ever-falling affordability levels compared to wage growth. This will likely see a continued push into the lower-priced options in the market over time. We can already visibly observe this trend with new housing estates being launched with blocks of land that are half the size of the older, more established houses.

I was speaking to my brother-in-law about this over the weekend as he was looking to buy a house after getting married. He has managed to save up a deposit and is on a good income as a fully booked-out Physiotherapist running his own business. Despite this, it’s likely that the house price-to-wage ratio right now is about as good as it will ever get for him if he keeps working as he does now. Of course, this is not his intention, and he intends to expand his practice to include other health services. However, this is the reality for most people who don’t have the flexibility to bolt on additional revenue streams.

Here’s the story in pictures.

Regional markets outperformed capitals due to lower-priced options and higher yields. In particular, we saw the regional property in the most affordable states of Adelaide, Brisbane, Tasmania, and Perth beat other markets over the course of 2024.

Moving across to the capitals, we saw the same pattern play out with respect to outperformance from lower-priced properties. The bottom (cheapest) 25% outperformed the top 25% pretty well across the board.

Perhaps it’s unsurprising, and you can easily observe the exact same capital rotation pattern in shares and cryptocurrencies. Humans are addicted to chasing dopamine that comes from making wins and will go further and further out the risk curve during a bull run.

The cycle always starts cautiously, with money only flowing to blue chips. As the cycle progresses, money flows into large caps, mid-caps, and finally, small caps and frontier markets at the end. The smaller end of the market tends to be the most volatile, with the biggest growth and hardest landing.

It is much the same pattern in property – it’s just that the overall volatility is lower than with shares. We started the cycle with the upper end moving, and we will end it with the lowest end moving. We still have roughly two to three years before the cycle peaks, though, and the final years are always the most exciting.

Posted by Gavin Chau, on 28th Jan 2025