In the post-COVID world, what is bad news for house buyers is turning into good news for unit buyers, particularly investors - and especially so in Sydney.

This remains true even as the Harbour City's unit prices softened in late 2022 and into 2023.

Why?

Let's take a look.

Sydney units: houses vs apartments 

Firstly, neither houses or units in Sydney are cheap.

A house on Sydney's uber-classy upper north shore will set you back around $2.1 million, according to SQM Research, while units are selling for around $770,000.

Happily, you can find a house in the less affluent south-west suburbs for an average figure of $955,000 or pick up a unit for $530,000.

But as with all things real estate, there's much more to these figures than meets the eye.

Let's take a look.

1. Sydney units: a (relatively) affordable option

One word says it all when discussing Sydney units, especially when compared to houses: affordability (well, relatively speaking). 

And surrounded as we now are with rising interest rates and cost-of-living pressures, who isn't looking for cheaper options these days?

According to Metropole's Michael Yardney, the pricing gap between Sydney's houses and units is now around 67%, thanks in large part to capital growth in houses outperforming apartments so far this year.

"So, I see increasing demand for these more affordable apartments moving forward," Mr Yardney said.

An Open Agent article concurred with this opinion, noting that while affordability was a big issue for any entry-level buyer in Sydney, long-term capital growth could well be achieved with a unit purchase in the city's eastern suburbs.

"This is especially true for suburbs on the new light rail line that will travel from the CBD to Kensington, passing through Surry Hills and Randwick," the article noted.

As well, unlike houses. Sydney's median unit price rose and fell at a "more measured (and) gentle rate" during and after the pandemic, according to OpenAgent.

Helping both Sydney's unit and house buyers further is New South Wales' First Home Buyer Choice scheme.

This government plan gives first-home buyers the choice of paying a lump sum, upfront stamp duty cost on properties worth $1.5 million or less, or an annual and potentially smaller, ongoing property tax.

2. Sydney units: rental performance

While Sydney's unit market has softened in recent months, the same can't said for this market's rental prices.

According to SQM Research, upper north shore unit tenants are now paying $740 in average weekly rents following an extraordinary 36% annual increase.

Meanwhile, on the city's south-west side, unit tenants will need to fork out $435 in weekly rent, after a 15% yearly uplift.

Back in December, the Property Tribune was already anticipating such growth, with unit rents forecasted to rise 15% in 2022- 2023, based on QBE's Australian Housing Outlook report.

"Over the two years to 2024-2025, stronger rental growth is expected for units than houses, with investor demand to be supported by strong growth in rents," the Property Tribune stated.

"Therefore, QBE expects Sydney’s median unit price to soften in the short-term before rebounding, reaching $850,000 in June 2025."

The Property Tribune added that re-opened COVID borders in early 2022 also helped the city's unit rental market to recover from its pandemic losses.

"Inner Sydney’s vacancy rate has fallen from 14.8% to 3.3% as of June 2022," the article stated.

Of course, the Harbour City's unit property investors are effectively not complaining about their rising median rental yields while tight vacancy rates of 2% on the upper north shore and just 0.9% in the south-west suburbs make for very keen tenants.

Yet added to these issues is the point that renters may just decide to buy, rather than rent, while a growing number of buyers could decide to enter the unit investment market for its strong returns.

3. Sydney units: "race for space" replaced by "space for place"

Mr Yardney notes that Sydney has embraced apartment living more than any other Australian capital and is a "city of renters, with a high proportion of people living in apartments or other types of dwellings".

As well, "family-suitable apartments" are increasingly regarded as an affordable alternative to houses - which, particularly in Sydney, are now beyond most buyers' financial reach.

Mr Yardney commented that while house performance outweighed that of units during the pandemic in the "race for space", this trend is now being traded in for one of "space (rather than) place".

"Affordability issues mean more people are trading backyards for balconies and courtyards, just to live in the right neighbourhood," Mr Yardney said.

"This is especially the case in popular areas such as Sydney's eastern suburbs and Northern Beaches, where homeowners are likely to enjoy continuing strong demand which will result in a strong increase in values.

"Family-friendly apartments in medium and low-rise buildings in Sydney's inner and middle-ring suburbs are also likely to perform well as investments."

4. Sydney units: "economy still firing along just fine"

Metropole writer and accountant Pete Wargent believes that despite many buyers suffering from mortgage stress, Sydney's economy is nevertheless "firing along just fine".

Mr Wargent highlighted NSW's very low unemployment rate, which at 3.2% is now the second lowest in the nation after the ACT, according to Australian Bureau of Statistics figures for March 2023.

Sydney's unemployment rate was 3.1% in the December 2022 quarter while in comparison, Melbourne's figure was 3.7% and that of Brisbane was 4.1%.

5. Sydney units: migration boom

Helping Sydney's unit market further is Australia's post-COVID migration increase which includes long-term and permanent migration, returning international students, and regional COVID "refugees" now working in city offices. 

Mr Wargent pointed out that Australia's population is also experiencing a "record high "of almost 600,000 people per annum.

"Sydney will be the most obvious beneficiary of (this) resurgence," Mr Wargent said.

Mr Yardney concurs, saying that the Harbour City was highly attractive to the "influx of migrants" into Australia since borders opened in early 2022, thanks in large part to its strong job opportunities.

6. Sydney units: apartment oversupply ... but undersupply looming

At the same time, Sydney's enviable oversupply of units won't last long as the city's population, including that of migrants, continues to grow along with post-COVID construction costs.

Current unit investors may enjoy the thought of this possibility but tenants and keen unit buyers?

Probably not so much.

"Construction costs for developing medium-density dwellings have increased by about 50% from pre-COVID levels, partly accounting for the crunch in building approvals," Mr Wargent explained.

"Crucially, therefore, we won't get any meaningful increase in the unit supply until prices rise by at least 25% from here, and probably more."

Mr Yardney adds that "the looming undersupply of new unit projects" will lead to even lower vacancy rates, rental growth and eventually, property price growth of these new apartments.

"In turn, this will help fuel increased price growth of well-located establishments in Sydney," he said.

We're here to help

Whether you're planning to buy or sell a unit or house, we can help you travel whatever home loan road you wish to take!

We can find you the best home loans from more than 40 of Australia’s biggest banks and specialist lenders and we can also help you refinance your loan to help you keep more money in your pocket.

So, give us a call today at Lending Loop.