The house vs unit thing must surely be one of the most overdone property articles ever. I got another grey hair just thinking about it. But let’s have a go anyway. To me, there are only two legitimate reasons to buy a unit over a house, and both are related to affordability
1) because you can’t afford to buy a house
2) They usually turn cash flow positive much faster than houses.
Let’s have a look at a few facts.
Do houses appreciate faster than units? Yes, they generally do – Australia-wide houses have grown at 7.1% per annum over the last 10 years, and units have grown 4.3% over the same period. No matter what time period you take the measurement going back to the last 40 years or so, the difference remains about the same.
That might not sound like much, but exponential growth has a cumulative effect. If both assets started at the same price, the house would be worth twice as much as the unit after 27 years. It’s hard to get away from the fact that land appreciates, and buildings depreciate. We can think of the building just as a mechanism to generate income so you can hold onto the land.
In the case of units, the value of the plot of land is spread over a larger number of dwellings (lowering the purchase cost) this is typically reflected in the lower purchase price of units. Often units are built on parcels of land which are too expensive to use for single houses.
Units tend to have a higher rental yield than houses. Nationally the rental yield for houses as of June 2022 is 2.4%, and the rental yield for units is 3.6%. The total return for units is 6.7%, and the total return for houses is 9.5%. It is important to note that the gross rent component of total return has tended to grow at around the same pace as CPI or wage growth.
Let’s project the cashflows out on these national figures and see what they look like over 15 years. We will use the following assumptions:
- $100,000 investor income
- Interest only loan
- 5% interest rate
- 2.5% inflation rate
- $1000/ quarter body corporate fees for the unit
- $500/ quarter maintenance costs for the house
- The investor can afford $295 per week
Under the stated assumptions, the investor can afford to purchase two units with a combined value of $1,200,000 compared to a single house of $950,000. However, despite having a significantly smaller asset base, the house purchaser has $665,000 more equity than the unit purchaser after 15 years. This equates to 67.4% more equity. I have provided 40-year projections for both asset types below.
It’s a clear win for the house when it comes to holding a single asset. But if the aim is to build a portfolio, the picture isn’t quite as clear. Despite starting at the same holding cost per week, the unit purchaser has $3,840 lower holding costs per year after 15 years. This allows the unit purchaser some extra income and borrowing capacity to purchase another investment or to divert the savings into an alternative investment.
It goes without saying that individual properties can perform better or worse than the national average, but overall, the example above is quite typical of many of the houses and units in the capital cities of Australia. While at face value, units seem to offer an inferior return over time, they can also offer a low-cost alternative to get a foot in the door and get your money working for you. In addition, they may suit investors early or late in their investment journey, where income tends to be prioritised over growth.