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In recent years, there has been a noticeable shift in the Australian property market, with first home buyers increasingly opting for units over houses.
This in-part can be explained simply due to affordability. Since the pandemic, we’ve seen the gap between house and unit prices widen to record levels.
CoreLogic reported that in March of 2020, the difference between the median house and unit values in capital cities was 16.7%. In February of this year, that gap increased to 45.2%.
This trend raises an important question—are first home buyers drawing the short straw by choosing units, or are they making a savvy move to enter the property market earlier?
The Appeal of Units for First Home Buyers
Current housing market sees a shortage of available properties for first home buyers due to high costs and limited supply. Add to this the struggle to maintain financial security in the face of high interest rates and the ongoing cost of living crisis, and it can be a real struggle for anyone trying to find a secure way into property ownership.
For many first home buyers, the appeal of units lies in affordability and location. Units are typically cheaper than houses, and are often situated in more central locations or near public transport.
| Median Value Houses | Media Value Units | |
| Sydney | $1,473,775 | $860,849 |
| Melbourne | $925,762 | $612,215 |
| Brisbane | $973,534 | $661,925 |
| Adelaide | $856,856 | $564,854 |
| Perth | $830,965 | $572,007 |
| Hobart | $692,504 | $536,932 |
| Darwin | $592,507 | $353,742 |
| Canberra | $966,684 | $583,164 |
Some ‘Hidden’ Costs to Consider
While units may offer a more affordable entry point into the property market, they bring additional expenses that houses often do not. Here are three things to consider before purchasing a unit:
Strata Fees
One significant cost associated with unit ownership is strata fees. These fees cover a range of factors, such as maintenance of common areas and facilities, and they can vary dramatically depending on the building’s amenities.
A unit with monthly strata fees of $500 equates to an additional $6,000 per year that must be budgeted alongside the mortgage payments. High-end residential complexes with luxurious facilities may charge strata fees upward of $10,000 annually.
It’s essential for buyers to factor these recurring costs into their budget and consider how they could impact their overall financial situation. It’s also a factor that a lender will consider in your loan application. If your strata fees will be $6,000 annually, that’s $6,000 taken out of your income which reduces your borrowing capacity.
Strata Reports
Before purchasing a unit, it’s wise to obtain a strata report. This report provides insights into the building’s financial health, any ongoing disputes, and potential upcoming expenses.
Obtaining a report typically costs between $200 and $500, and is a crucial step in the process.
For example, a strata report could reveal a pending $50,000 special levy to address structural repairs, which could drastically affect the decision to buy. Being aware of such impending expenses allows a buyer to make a more informed decision and potentially negotiate the purchase price.
While obtaining a strata report is a one-time cost for a particular unit, these costs can stack up the more time you’re in the market. Consider the scenario where you have to inspect and make an offer on multiple units. Add to this the potential for a building report and you’re looking at hundreds or potentially even thousands of dollars in additional costs.
The 50 Square Metre Rule
Many banks and lenders have minimum size requirements for units, often referred to as the ’50 square metre rule’. Units under this threshold can be harder to finance, potentially limiting resale value and future investment opportunities.
For instance, a 45 square metre unit might only be financed at 80% of its value rather than the typical 90-95%, necessitating a larger deposit. It’s a policy of many major lenders, and could trip you up in your pursuit of a first property purchase.
You don’t want to be caught off guard making an offer only to find out that you can’t get the required finance. Additionally, if lenders are less willing to finance these smaller units, you may have more difficulty finding a buyer if you wish to sell in the future.
Benefits of Getting into the Property Market Earlier
Despite these costs, purchasing a unit may still be the best move for first home buyers. Entering the property market sooner allows buyers to start building equity and take advantage of a property market that continues to see prices rise.
A unit can be a great place to live or simply a stepping stone on an investment journey, providing an affordable entry point that can later lead to upgrading to a house as equity and financial circumstances improve.
As Mark Bouris points out, accessing the current property market now might still be a great option for many first home buyers. If first home buyers have the deposit and can afford the current interest rates, buying now, before rate reductions potentially increases borrowing capacity and pushes up property prices.
Making the Right Decision
Navigating these complexities requires careful consideration. Seeking assistance from a financial advisor or professional broker can help first home buyers analyse the costs and benefits, ensuring they make a decision that aligns with their financial goals.
Brokers can also provide tailored advice on securing the right loan, understanding the hidden costs, and making informed choices in a competitive market.
If you’re considering buying your first home and want to ensure you’re making the best choice for your circumstances, reach out to a Yellow Brick Road broker today.
