HUG: House Unit Gap – Melbourne’s Apartment Opportunity

Posted by Dominic Cavagnino

The Blue Wealth research team are constantly on the look-out for changes in market trends that may expose an opportunity for our clients. Key market indicators drive our research and are major influences on our strict research methodology.

One major focus for us, particularly in Melbourne has been the house unit gap. We’ve identified this as the HUG. Essentially, what we are trying to identify are suburbs where the gap between house and unit prices have reached an unsustainable level. This will become a major driver for demand in the apartment market.

Basically, the house unit gap measures how much more expensive houses are than units. For example, if the median house price in a suburb is $1,000,000 and the median apartment price is $500,000 the HUG is 100%.

To obtain a level of relativity and understand what an unsustainable gap between property types is, we compare specific suburb markets to their respective capital city averages. Let’s use Melbourne as an example. Over the past 10 years Melbourne’s average HUG is 25.8%, it currently sits at 52%, more than double the 10-year average.

Evidently, the house and unit gap in Melbourne is at its highest point in 10 years. As affordability in house prices becomes strained, we’re likely to see demand transition to the unit market.

We’re currently in an environment with historically low interest rates. This has resulted in an increase of new unit supply in all our capital cities. This supply has diluted the potential growth in apartments for the short term but has exposed a rare opportunity. As supply begins to slow and Melbourne’s population continues to grow, the rising apartment demand will place upward pressure on the apartment market.

In saying this, here’s a list of the suburbs which we have approved over the last two years and their HUG’s.