Should I Buy A House Or A Unit?

There is an age old debate amongst investors as to whether a house or a unit is a better investment.
Many investors get caught up asking if they should buy a house or a unit, when in reality they should be asking what type of property will deliver the largest return on investment over the long term.
According to the Real Estate Institute of Australia (REIA), there’s not a massive difference in long term price growth between these two types of dwellings. In fact over the past ten years, median house prices have increased by 81%, while median apartment prices increased by 72%.

Positives of buying a house –

• Capital appreciation:
While houses have only outperformed units (on average – Australia wide) by 9% in the last 10 years this is still 9% in your pocket. Many successful investors and developers agree that land appreciates, while buildings depreciate. In theory this means a higher land to building ratio will result in your asset growing in value over time.
• Capital gains:
It is generally easier to increase the value of a house than it is to increase the value of a unit.
Because you own the entire property, which means you can add value to the entire property relatively easy through renovation, extension and development.

Changing demographics:

As the next generation of Australians enter the market, there will be an increase in demand for new and existing houses.
While our generation has enjoyed unit, town house and inner city living in our early twenties, the demand for larger property will begin to show as we look to raise our children. This demand for larger property will put renewed pressure on Australia’s under supplied housing market.


Supply and demand:

In theory there is an unlimited supply of land in Australia. In reality most people don’t want to live in 95% of the places this land is available.
Unfortunately this has created a supply and demand issue in the metropolitan and regional centres of Australia. Unless local and state governments begin to work with developers this supply and demand issue will continue to persist into the foreseeable future.

Negatives of buying a house

• Houses can come with a hefty price tag.
This means for many first home buyers, upgraders and investors the dream of home ownership may not be viable.

Holding costs and maintenance costs:
Houses can be expensive assets to hold when you factor in:
• Interest
• Insurance
• Council fees
• Water
• Electricity
• Management
• Maintenance
• Renovations
It’s extremely important to factor in all of these costs when comparing the return on investment between a house and a unit.

Unfortunately the prices in many of Australia’s metropolitan and regional centres mean home owners and investors are being forced into buying houses in the less desirable fringes.

Positives of buying a unit

Units are traditionally cheaper than houses, with units often selling for $50,000 to $100,000 less than houses in most suburbs in Australia.
The rise in Australian property prices has seen the popularity of units sore as they enable first home buyers, downsizes and investors an affordable entry point into the market.

While almost all new housing stock is being built on the fridges of Australia’s capital cities, the majority of Australia’s new units are being built in highly desirable city, beachside and suburban locations.

The demand for affordable and connected housing is resulting in a shift towards unit living.

Running costs:
The cost of owning running a unit (body corporate / strata fees aside) can be significantly lower.

I have lived and owned both houses and units and my annual holding costs on a $400,000 property were as follows:

The benefit of living in a shared space can be a sense of community and new relationships.

Negatives of buying a unit

Capital appreciation:
If there is any truth in the history of the Australian property market a higher land to building ratio will result in your asset growing in value over time.
Unfortunately this means the majority of the value in a unit is in the building.
If history is to repeat itself then houses will continue to outperform units over time.

Capital gains and valuations:
It is more difficult to manufacture a capital gain into a unit for a number of reasons:
You have little control over the external appearance of a unit
You have to adhere to the guidelines set by the body corporate
You cannot extend or develop the land in any way
It’s also important to understand that the value of your unit will always be dependent on the cheapest unit in your complex. This means if you own a unit on the 6th level of a building and renovate it beautifully, the value of your unit will still be loosely tied to the value of the un-renovated unit, with no views on level 4.
This point is super important (I had to learn this one the hard way – take a look at the 1st investment property I ever bought) and is often missed by investors.

Tenants, noise and security:
I think these are all speak for themselves.
At the end of the day there are advantages and disadvantages to buying both houses and units. It’s important to maintain a long term view and buy properties that perform well over time, those in areas of high demand that are close to essential services and infrastructure.

If you are currently tossing up whether to buy a house or a unit why not give me a call and we can discuss what best option will suit you and your budget.

Kind Regards,
Ron Palmer

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