Not all land is created equal

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Michael Yardney - Metropole

Some suburbs will be more popular than others, some areas will have more scarcity than others and over time some land will increase in value more than others.

 

Of course these are the areas property investors should target, as that’s where they’ll get above average capital growth.

 

Where does property increase most in value?

 

For as long as I’ve been investing the argument has been raging: regional Australia vs. capital cities; or inner suburbs vs. outer suburbs.

 

There are always exceptions. Some better performing regional areas have exhibited more capital growth than some under performing capital city suburbs and some high growth outer suburbs have grown faster than some demographically challenged inner suburbs.

 

But overall for strong, stable long-term growth that outperforms the averages the inner and middle ring suburbs of our capital cities are the place to invest.

 

 

Now this wasn’t always the case.

 

Around the time of Federation (at the turn of the 20th century) the price of country property was equal to and in some cases greater than the cost of similar properties in the city. But over time this has slowly changed as we have moved from an agrarian society to an industrialized nation.

 

After the Second World War the arrival of a large number of overseas migrants who preferred to live in cities, in particular Sydney and Melbourne, led to a larger increase in value of capital city properties over regional properties.

 

I guess it’s much the same today; the majority of migrants want to live in our capital cities where the jobs are. And this trend is unlikely to change in the foreseeable future with few significant decentralization initiatives in the pipeline.

 

This means investors seeking long-term capital growth should only be investing in our larger capital cities.

 

Investing in the Inner or outer suburbs?

 

10 years ago a study from Macquarie Bank showed that (in general) properties closer to the CBD and the water increased in value faster than those further from the CBD and from the water.

 

This general trend has again been confirmed by a paper the Australian Housing and Urban Research Institute (AHURI) which found that both in percentage terms and in absolute terms over the long haul suburbs located reasonably close to the CBD, where demand is high, close to employment and where most people want to live and where there is no land available for release, outperformed the outer suburbs.

 

The paper explained:

“Housing markets, which were once relatively egalitarian cross Australian cities, have become polarised”

 

“The homes affordable to present (and future) lower moderate income home buyers are now confined to the outer suburbs and will only increase in value at slower rates compared to housing in the more expensive inner and middle suburbs – effectively trapping poorer households on the edges of our cities.”

 

Now this brings up a whole raft of social arguments…

 

The process of gentrification and rising prices has locked a generation of younger people out of inner city housing and it is likely that the gap will only widen over the years.

 

I’ll leave discussion of the remedy for this to the politicians and town planners, but the conclusion for property investors is that if you want to own the type of property that will outperform the averages, the inner and middle ring suburbs are the places to be.

 

The facts:

Using Melbourne as an example an AHURI study presents what they call a “bid rent curve” that shows the variations in property prices and rents as one moves further away from the CBD.

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