The Australian property market is undergoing a significant shift as unit prices rise faster than house prices in about 60% of suburbs nationwide. This trend reflects a changing landscape where affordability constraints, reduced borrowing capacity, and shifting buyer preferences are reshaping the market. Key data from CoreLogic and other sources illustrate this evolution, highlighting unique regional variations and investment opportunities, particularly in cities like Melbourne, which is poised for recovery after recent underperformance.
Rising Unit Prices and Widening Price Gaps
The national average price gap between houses and units has reached a record 48.2%. This disparity is particularly pronounced in major cities:
Sydney: The gap is 72.7%, or $620,272.
Canberra: The difference stands at $401,822.
Melbourne: Houses are $333,837 more expensive than units.
Affordability challenges are a primary factor driving buyers toward units, which offer a more affordable entry point. The average cost of a unit in Australia’s capital cities is $682,000—about $287,000 less than a house. This has attracted increased demand from investors and first-home buyers, who are drawn to units’ lower prices and potential for higher rental yields.
Market Shifts and Regional Variations
Capital Cities Outpace Regional AreasWhile the growth in unit values is a nationwide trend, regional variations are significant. Sydney suburbs such as Parramatta (including Telopea, Dundas, and Newington) and Melbourne suburbs like St Kilda West and Elsternwick have seen units grow four to six times faster than houses. Over the past year, units in the combined capital cities rose by 5%, while house prices grew 6.99%, slightly outpacing units.
Brisbane and Adelaide Narrowing the GapIn Brisbane and Adelaide, the price gap between houses and units has started to narrow. Brisbane units rose by 5.8%, surpassing the 3.4% increase in house prices over the past three months. In Adelaide, units increased by 7.1%, outpacing houses by the same margin. In contrast, Perth follows the national trend, while in Darwin, house prices continue to outpace units, reflecting lesser affordability pressures.
Melbourne: A Unique Investment Opportunity
Melbourne’s market has struggled in recent years, with prices still 4.4% below their peak in March 2022, despite a 10.6% increase since March 2020. This underperformance has created a window of opportunity for investors, especially given the unprecedented price gap with Sydney. Melbourne houses are now about 41% cheaper than those in Sydney, representing a difference of over $600,000. This is the lowest price differential between the two cities in 20 years.
According to David Edwards, CEO of First National Real Estate, Melbourne’s slow recovery presents an opportunity to buy undervalued properties, particularly as confidence returns. With strong population growth and limited supply expected to push prices upward, Melbourne is anticipated to catch up to other capitals over the next couple of years.
Economic and Legislative Challenges in MelbourneMelbourne’s market has been affected by various economic challenges, including a net loss of 7,606 businesses and increased taxes. Stricter tenancy laws and higher land taxes have deterred some investors, yet these issues also create opportunities for those looking to invest strategically in undervalued areas. High demand has driven rental prices up significantly, with vacancy rates at a tight 1.5%, below the balanced market level of 2-2.5%.
Gentrifying Suburbs and Affordable HousingFor those seeking value in Melbourne, gentrifying inner and middle-ring suburbs such as Essendon, Moonee Ponds, and Blackburn are becoming popular with families and professionals alike. Additionally, townhouses and villa units are in demand as affordable alternatives to standalone houses. Suburbs like Glen Waverley and Bentleigh offer appeal for both young families and investors, aligning with the broader trend towards higher-density living.
National Trends: The Lower Quartile Leads Growth
Across Australia, properties in the lower price quartile have experienced stronger growth than higher-end homes. Lower-priced homes increased in value by 3.3% over the past three months, while the upper quartile rose by just 0.8%. In Sydney, affordable suburbs like Wiley Park, Punchbowl, and Yagoona saw price increases between 5.8% and 7.2%. Meanwhile, in Melbourne, inner suburbs such as Balaclava and Middle Park saw house prices rise by up to 3%, bucking the general downturn trend.
Looking Forward: The Australian Property Market in 2025
Experts predict that unit values will likely continue to outpace houses as affordability remains a key concern. Moderate growth of 1-4% is anticipated across Australian cities over the next year. However, market fragmentation will likely result in varying rates of growth across regions. For example, cities like Canberra, Hobart, and Darwin may experience slower or even negative growth.
The Melbourne market, however, is projected to benefit from strong population growth, infrastructure investments, and demand for affordable housing. Population growth is set to remain robust, with Victoria’s population expected to reach around 10 million by 2050, requiring approximately 1.5 million additional dwellings. This includes detached houses, apartments, and townhouses.
Supply Constraints and Infrastructure ChallengesWhile demand is expected to remain strong, Melbourne’s housing supply will likely struggle to keep pace. New dwellings in Victoria are forecasted to be at their lowest in ten years, with construction commencements falling. Infrastructure developments, such as the Metro Tunnel and Suburban Rail Loop, aim to address growing transit needs but may not fully meet the demands of a booming population.
Conclusion
The Australian property market is shifting, with units gaining ground as affordability drives buyer demand. While Sydney and Melbourne exhibit significant price gaps, Melbourne’s unique position and underperformance offer strategic opportunities for investors. Population growth, infrastructure development, and demand for affordable housing will shape Melbourne’s trajectory, making it a city to watch as it recovers and potentially outpaces other capitals in the coming years. As economic conditions stabilize and interest rates eventually fall, both units and affordable homes are expected to continue leading market growth, reshaping Australia’s real estate landscape.