Why Houses Outperform Units in Australia: A Data-Driven Analysis

Investing in Australian real estate has long been a popular strategy for building wealth, but the choice between houses and units can be a critical decision. Historical data and recent trends clearly show that houses tend to outperform units in terms of capital growth and overall return on investment. Here, we delve into the reasons behind this trend, supported by real data.

Capital Growth Potential

Land Appreciation

The primary reason houses outperform units is the value of the land they sit on. Over the past 30 years, Australian house values have increased significantly more than unit values. According to CoreLogic, house values have risen by approximately 382% since 1992, while unit values have increased by around 213% over the same period. This difference is largely due to the fact that land appreciates over time, whereas buildings depreciate.

Historical Price Trends

Since the onset of the COVID-19 pandemic, the disparity between house and unit prices has widened. By March 2024, house prices had surged by 44.2% compared to pre-pandemic levels, while unit prices increased by 21.7%. This growing gap highlights the stronger capital growth potential of houses.

Flexibility and Customization

Renovation and Expansion

Houses offer greater flexibility for renovations and expansions, which can significantly increase their value. Investors can add value through extensions, landscaping, or even subdividing the land, depending on local regulations. Units, however, have limited scope for such enhancements due to strata regulations and shared ownership of common areas.

Customization

The ability to customize a house to suit personal preferences or market demands can make it more attractive to buyers and tenants. This added appeal can translate into higher resale values and rental yields, providing a significant advantage over units.

Rental Income and Market Demand

Higher Rental Yields

While units have traditionally offered higher rental yields, this trend is shifting. Recent data shows that rental yields for houses are catching up. For example, in Perth, house rents grew by 4.9% from March to October 2023, compared to a 2.5% increase for units. This shift is indicative of the increasing demand for houses, driven by their larger living spaces and greater privacy.