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Houses v units: the risk gap for investors widens further

The difference between buying a house and buying a unit rental property has never been more pronounced, according to RiskWise Property Research.

RiskWise CEO Doron Peleg cites oversupply of units in inner-city areas, falling CBD rents, and the recent rise of remote working situations as red flags for those planning to purchase rental units.

Conversely, he explains there are “many opportunities for buyers looking for houses with high land value as a proportion of the property value, and a strong component of scarcity,” especially if they are planning to keep the property long-term.

“In recent weeks there has been a material improvement in buyer sentiment and key data,” Mr Peleg explained, “with a prime example being the relatively high auction clearance rates for houses in Sydney, with preliminary results that have been consistently well above the 70 per cent mark during the past four weeks.”

Melbourne’s market, however, remains dormant, for now.

“It’s important to distinguish between the two capital cities and there is a marked difference,” Mr Peleg said.

“The Sydney property is strongly forging ahead with auction clearance rates tracking at levels similar to those of 12 months ago.

“The same cannot be said for Melbourne, especially due to the second wave of the COVID-19 which had a major and immediate impact.

“Prices in Melbourne have declined by about six per cent since their peak in early April 2020, according to CoreLogic, and this is the largest fall recorded amongst all capital cities.

“Despite this, Melbourne’s houses have better long-term prospects than Sydney’s. Indeed, we expect 2021 to be a strong year for houses in Melbourne, with significant capital growth forecast to play out.”

Mr Peleg asserts that post-pandemic, Melbourne houses will have “similar projections to Sydney thanks to chronic undersupply increasing land and house values”, noting the reverse is true for the oversupply of units in the city.

“So while things look gloomy at this point of time, certainly in Melbourne, the market will likely bottom in the first half of 2021 and then the traditional connection between low interest rates, dwelling price growth, and the continuous chronic undersupply of family-suitable properties, with good access to employment hubs in popular areas, will drive them up relatively quickly.

“Land scarcity has been and will continue to be a major driver in land appreciation and, consequently, the appreciation of house values.

“However, investors should consider family-suitable properties as opposed to rental apartments which will continue to carry a high level of risk in relation to both price movements (equity risk) and serviceability (cash flow risk).

“This risk of negative equity has significantly increased across the country.

“Poor economic growth and a soft employment market will see the attractiveness of Australia as a destination fall in the short term.

“Therefore, without a significant improvement in employment conditions in the next few years, the risk to the rental apartment sector is likely to remain high.”

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