The most popular inner Melbourne suburbs for home buyers on a budget

Unit values are rising faster than house values in a string of inner-city and bayside suburbs, as Melbourne home buyers compromise on property size to break into affluent areas at more affordable prices.

Median unit growth outpaced median house growth in Black Rock by 7.9 percentage points in the three months to July, CoreLogic data shows, with unit values rising 1.9 per cent and houses falling 6 per cent.

In Windsor and Armadale, the unit market beat houses by 7.7 and 7 percentage points respectively, and there were sizeable gaps in Prahran, Carlton North and South Yarra.

The shift comes as higher interest rates have reduced borrowing capacity, forcing some buyers to lower their budgets.

CoreLogic’s head of research, Eliza Owen, said more buyers looking to purchase in inner-city and bayside suburbs had turned to units as house prices receded from reach.

“The relative boost to housing values is definitely making more people pivot towards the unit sector,” Owen said.

“It’s something that historically has had a slow uptake, the move to units over houses, but the big accelerator over the past few years has been the relative strength in the house market compared to the unit market.”

Owen said suburbs where unit prices had risen, excluding Frankston, were close to the city and recorded large price gaps between standalone homes and units.

“The unit market is now playing a bit of catch-up where houses have simply become too expensive,” she said.

“This reflects people’s willingness to compromise on space to have relatively affordable access to central and more desirable areas of Melbourne ... their other choice might be to own a house much further from the centre of the city, but for some people that’s not really an option.”

Belle Property Armadale director Andrew James said the high number of apartments in inner-city areas meant first home buyers could buy in affluent suburbs at more affordable prices.

Buyers could buy a unit in Armadale for $688,656 – a third of the suburb’s median house value of $2,611,398.

“First home buyers [who] are priced out of the market for houses are looking for good-size apartments in the inner city and in Armadale, Windsor and Prahran because of the lifestyle,” James said.

“They may be renting and now deciding on buying because the repayment on an apartment, compared to renting, the price gap is not massive. So as a result, a lot of renters are now looking at jumping onto the buying bandwagon.”

James said while first home buyers had mainly been driving the unit market, investor activity had started to pick up over the past few months, helping prop up apartment growth.

“This sector of the market has been incredibly resilient over the last 18 months ... because of the profile of buyer you’re looking at attracting.”

PEXA chief economist Julie Toth said rising house prices had caused a shift towards unit and apartment living.

“There is the affordability and pricing problem for many that do want to stay in the city where housing, particularly freestanding housing, is less affordable, and so the lower-priced apartments are more attractive,” she said.

Toth added the popularity of units had increased since Melburnians returned to CBD offices, with many buyers moving back to inner-city and suburban areas following a pandemic tree change.

“The big demand was for larger detached homes where people can work from home; it was about moving to the regions and moving out of the city,” she said. “What we’re now seeing is not so much a reversal of that trend, but a bit of a catch-up with the parts of the market that missed out on that growth.”

O’Brien Real Estate Bentleigh partner and auctioneer Harrison Mosley said there was greater competition for units in bayside areas such as Black Rock, where there aren’t as many apartments as in inner-city areas.

“One of the reasons you’ve seen good growth come from some of these areas is because ... there’s a lack of supply for these properties and generally when they come up, they’re pretty competitive,” he said.

“Getting a full block of land or a house in that sort of suburb can be tricky in terms of pricing. [Units] leave a good option for buyers to still get into the location that they want.”

Mosley said higher mortgage repayments fuelled by rising interest rates had forced some buyers to lower their budgets.

“We’ve had this level of interest rates for a while and, obviously, some people are just not as willing as they were a couple of years ago to take on that level of debt with the way interest rates are, so they compromise a little bit and go for something a little bit more affordable, being a unit or apartment,” he said.