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Unit investment? You might as well buy in the Metaverse

When it comes to property investing, one of the first choices you’ll have to make is deciding what type of property you’ll invest in. Of course, everyone wants to buy a house, but this isn’t a realistic option, especially for first time investors with limited finances. 

So what about units in investment strategies? The cost of a house in Sydney, for example, might be too expensive for a first-time investor. So are units in Sydney a good investment alternative?

While conditions on the surface appear ripe for unit profits, some basic fundamentals make them a poor choice for smart investors. For the first time in over two years unit prices across capital cities have outperformed house prices, but that’s delivered a false sense of confidence to some investors.

In reality, investors thinking of purchasing Sydney and Melbourne units might as well be buying in the metaverse.

The desertion of unit users during COVID – such as students, overseas transient workers and CBD hospitality staff – hit prices hard which created a perceived ‘affordability vacuum’ that drew in some investors.

But if you look at medium term statistics, house prices rose 34 per cent from the bottom of the pre-pandemic market, while unit prices rose just 10 per cent over the same period.

The numbers are more telling if you look at long-term trends where houses have consistently outperformed units. Since 1990, research shows that unit values as a percentage of house values have progressively fallen from around 83 per cent to approximately 60 per cent.

So, for every $100,000 you invest in a unit instead of a house, you’d have lost $23,000 in capital gains over that time.

We predict in 20 years that units could be well below 40 per cent price disparity compared to houses too.

But why is this the case? What is the difference between a unit and a house?

The main reason units fail is their lack of scarcity. When you buy a unit you’re buying airspace – and that’s unlimited. That’s not a rare or scarce resource. Houses, on the other hand, have land content, and we aren’t making any more land. 

So, do houses appreciate more than units? Yes and no. While the building itself isn’t appreciating, the land it sits on is. 

What we’re seeing now in unit markets is comparable to the recent rush on metaverse blocks. Just a few months back metaverse blocks promised to be an easy buy-in at ‘the ground level’ which had some investors hurrying to acquire virtual land online.

But that market has crashed because of a lack of scarcity – metaverse blocks can be created by a code. Units are a similar principle. 

Instead of investing in units in Sydney and Melbourne, buyers should look for detached houses in other locations across the nation. It’s best to seek out these free standing houses in other parts of the country where dwellings are still at the bottom of their market cycles.

There are still plenty of affordable houses out there that are under $500,000. And these offer substantially better short and long-term strength compared to Sydney and Melbourne units.

And remember, only invest what you can afford to lose!

PK Gupta
Published: 19 Sep 2022


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