Debunking the myth of prime (inner bluechip suburbs) property

H

Harris

Cover story in Aug edition of API

This is how it starts.. (courtesy of API)

"Ask anyone who makes a living advising people about property purchases and most of them will tell you the "better" suburbs always deliver and you are crazy to buy in outlying areas. Media has reported this mantra so often its become accepted as truth: the best value growth resides in the blue-chip areas.

The problem is, its bunkum. Its one of the great myths of real estate investment. Prime-located real estate does not always out-perform on capital growth.

The "experts" keep saying it, but the facts keep contradicting them. Indeed most data shows the top performers in our major cities are dominated by "ugly duckling" outer suburbs or mid-priced areas. Whether examined over one, five, ten or fifteen years, its difficult to find any examples of top end locations which have led the market......"

and so it goes providing real data from across australian cities to prove that point...


This is the same point I have been trying to make in my multiple posts looking at the actual data comparing short, medium and long term capital growth for various Melbourne suburbs (both inner and outer) and not understanding the perseverance for this long standing myth.

Harris
 
Last edited:
Further down in the article..

"7 of Melbourne's top 10 suburbs for price growth over five years had median house price below $285,000. Lowly Frankston North, where typical house cost $175,000 (its moved up to $210k now) had the same growth rate as Toorak, where the average home costs close to $2 million.

Another report late in 2006 showed that cheaper, outer ring suburbs were achieving price growth two or three times more than city average. Suburbs such as Berwick, Craigieburn & Cranbourne had seen prices grow between 10 and 13% over two years while Melbourne prices overall had risen just 4%...."

(again courtesy of API)

Go the outer suburbs..!

Harris
 
thank you for posting this, I have to buy this mag now!

For some reason I had the same stupid idea in my head that I have to buy in blue chip suburbs as they are somehow better then the rest.

But other forum members asked me are you really sure, now you with this article :)

As I'm approaching of finally buying my first IP I need to rethink my strategies here and instead of buying one house close to Brisbane, perhaps I can buy two townhouses in say Beenleigh etc..
 
Harris said:
Further down in the article..

"7 of Melbourne's top 10 suburbs for price growth over five years had median house price below $285,000. Lowly Frankston North, where typical house cost $175,000 (its moved up to $210k now) had the same growth rate as Toorak, where the average home costs close to $2 million.
Click to expand...

If you read between the lines, this is what you get:

Let's say both suburbs grow at 10%.

Frankston - $21,000 growth
Toorak - $200,000 growth

I know which I'd prefer.

Mark
 
Mark Laszczuk said:
If you read between the lines, this is what you get:

Let's say both suburbs grow at 10%.

Frankston - $21,000 growth
Toorak - $200,000 growth

I know which I'd prefer.

Mark
Click to expand...

The point I always make is that -

If both areas are to grow at similar rate, what would you prefer:

$2 million worth of property getting you 6% yield in outer suburbs (Frankston) or

$2 million property in inner blue chip suburbs giving you 3.5% yield (Toorak)

If the cap growth is equal, then it surely allows you to carry 10 properties in Frankston Nth vs 1 prop in Toorak. Not only that the capital growth will be the same, the increased yield will cost you less to hold the portfolio in outer suburbs and hence allowing you to increase the portfolio further (in outer suburbs) at a faster rate than in inner bluechip suburbs.

Harris
 
I agree that over the long term (i.e. at least 12-14 years), the average growth is very comparable, especially after yield. What I have found is that outer is more volatile and inner is less volatile.

For periods less than that it is very different. For the 10 year period around 1990-2000 (give or take a year or two) Carrum Downs, Cranbourne, Traralgon (and Ringwood I believe) experienced practically 0% growth. We lived in these areas. It would be awful to hold an entire portfolio of these properties only for that entire period. The ability to duplicate through growth is non-existent.

I stepped in 2001 and bought my first IP in Carrum Downs. Owner built for 120k in early 90's and added a double garage and some decking. I bought it for 137k in 2001. He basically went nowhere after 9 or so years. 2002 = 170k, 2003 = 225k, 2006 = 225k (all bank valuations). I've got a Herald Sun article showing the 'boom suburbs' of Narre Warren (45%) and Frankston (44%) around this time. I was after cashflow, I had no idea how good my timing was with the CG.

Given we've just had a price surge, what will the next few years bring...? Harris, you might be fine with Frankston given it's beach location but those other outer burbs I wouldn't be surprised to see not much for the next 3 years.

That's why I like to have a mix. Old/new, inner/outer, house/apartment, low end/high end. I'm happy with an average 5-7% growth across the portfolio - the machine will still work. If it's consistent I can duplicate and I think having the mix makes it more consistent (even if not spectacular). Controlling the most gross asset I can service is more important to me.
 
G'day David

I actually was thinking of you, when writing that post knowing that you picked up a great property in Toorak not that long ago.

I started my PI journey by buying in 2 very blue chip suburbs of Kew and Mont Albert, and over the last 5 years, they are the only properties to have given me the least amount of capital growth out of my entire portfolio.

I have alluded to the volatility factor previously in the same posts, however being buy and hold investors (and not buy & sell), its good to gauge the performance of the portfolio over at-least 3 years or more, thereby negating any short term volatility factors coming in the mix.

When talking about blue chip inner city properties, ,I know that following the slump / peak of property market in late 2002, Syd and Melb blue chip suburbs virtually had no growth, infact suburbs like South Yarra, Geln Iris and Camberwell registered negative growths, hence proving that inner suburbs are not immune to short term volatilities or are virtually bullet proof in holding their values.

Agree with your point though, that blue chip suburbs can cushion short term fluctuations better than outer mortgage belt.

Harris



DavidMc said:
I agree that over the long term (i.e. at least 12-14 years), the average growth is very comparable, especially after yield. What I have found is that outer is more volatile and inner is less volatile.

For periods less than that it is very different. For the 10 year period around 1990-2000 (give or take a year or two) Carrum Downs, Cranbourne, Traralgon (and Ringwood I believe) experienced practically 0% growth. We lived in these areas. It would be awful to hold an entire portfolio of these properties only for that entire period. The ability to duplicate through growth is non-existent.

I stepped in 2001 and bought my first IP in Carrum Downs. Owner built for 120k in early 90's and added a double garage and some decking. I bought it for 137k in 2001. He basically went nowhere after 9 or so years. 2002 = 170k, 2003 = 225k, 2006 = 225k (all bank valuations). I've got a Herald Sun article showing the 'boom suburbs' of Narre Warren (45%) and Frankston (44%) around this time. I was after cashflow, I had no idea how good my timing was with the CG.

Given we've just had a price surge, what will the next few years bring...? Harris, you might be fine with Frankston given it's beach location but those other outer burbs I wouldn't be surprised to see not much for the next 3 years.

That's why I like to have a mix. Old/new, inner/outer, house/apartment, low end/high end. I'm happy with an average 5-7% growth across the portfolio - the machine will still work. If it's consistent I can duplicate and I think having the mix makes it more consistent (even if not spectacular). Controlling the most gross asset I can service is more important to me.
Click to expand...
 
I personally haven't experienced the 'consistent growth' of the blue chips yet. Thanks for your real world experience. I'm with you on busting the myth.

All of that chatting with the Wakelins almost had me thinking the rest of my portfolio was dog s**t. All of these examples of 10% growth, 4% yield versus 6% growth, 6% yield began to mess with my head. Then I did the maths and found that Carrum Downs had an average of 8.6% growth over the last 30 years, and thats a 'same house/no improvements' comparison on three separate very average properties. Not too bad at all. Some might say it's got a lot against it - huge amounts of 'supply' around, not really that close to the beach and it's a poorer area.

I'd say at any given time when the inner is flat the outer might be growing and vice versa (here's hoping!).

Have to say those development blocks you picked up in my home town of Franga seem like wonderful buys, well done! If you need to offload a unit in the future give me a buzz ;)
 
Harris said:
I started my PI journey by buying in 2 very blue chip suburbs of Kew and Mont Albert, and over the last 5 years, they are the only properties to have given me the least amount of capital growth out of my entire portfolio.
Click to expand...

Did you catch Twitch's post about Hawthorn doing 21% year to date? (17% if you minus his reno). Maybe it's time to have yours revalued, or is this how you have been able to buy half of Frankston!?
 
Harris said:
Cover story in Aug edition of 2007
"The "experts" keep saying it, but the facts keep contradicting them. Indeed most data shows the top performers in our major cities are dominated by "ugly duckling" outer suburbs or mid-priced areas. Whether examined over one, five, ten or fifteen years, its difficult to find any examples of top end locations which have led the market......"
Harris
Click to expand...

Harris
Very true, it's common knowledge that in a property cycle more popular areas move first
but sooner or later the suburbs that haven't had much CG will be seen as good value
and you will need to be there to enjoy the capital gain :)
Cheers
 
Interesting Discussion

Hi Harris and David,

I find this topic very interesting. I too have spent time chatting with the Wakelins. I couldn't sleep for several months after my visit to them!! I showed them my portfolio which consisted of some inner city properties and houses in the outer areas. (Frankston included). The advice from the Wakelin group was to sell all of the outer area stuff in my portfolio and pronto! No doubt this would have facilitated me buying through them! Thank goodness I haven't! This forum, and Harris' posts in particular have actually stopped me from making such a herrendous decision!!

I am a bit like David in the sense that I do hold IP's in the inner and outer areas. I am planning to buy one more in an inner suburb in the near future and am planning to hold it for the long term.

Jan Sommers has a chapter in one of her book's on the topic of buying in the inner or outer suburbs. She mentions that she had a sociable debate with a good friend who was buying in the inner areas. He mentioned that his portfolio would be worth far more than her's in 10 years time. Jan's portfolio at the time consisted of IP's that were a fair distance from the city. I believe that after ten years Jan had more properties, and that the value of their portfolios was basically the same!

Regards Jason.
 
in regards to 2 million WORTH of property
and ONE 2million dollar property

Im assuming 2 million worth in frankston is about 9-10 properties.
Each property would incur rental management costs etc, would this cut into your profit margin much? i guess one bonus would be deppreciation on all those properties also, that may balance it all out.

I guess at the end of each tax year, whatever scenario you choose, as long as you have a good amoiunt of growth and are able to keep buying property, all is well.
We are aiming to get ahead through those"cheaper suburbs" so we can start investing in the better blue chip areas, just to spread our portfolio around.

food for thought though.Thanks for the thread.
dags
 
DavidMc said:
Did you catch Twitch's post about Hawthorn doing 21% year to date? (17% if you minus his reno). Maybe it's time to have yours revalued, or is this how you have been able to buy half of Frankston!?
Click to expand...


Hi David,
Haven't had my prop in Kew and M Albert re-valued since I bouht them in 2002, however looked at comparable sales in the area. I plan to get those revalued this week or next to get an exact idea of the overall growth.

Harris
 
dags said:
Im assuming 2 million worth in frankston is about 9-10 properties.
Each property would incur rental management costs etc,
Click to expand...

Not to mention the joy of dealing with 9-10 potential problem couples/families. My one Carrum Downs property represents 80% of my tenant issues. One of the downsides to investing in lower socio-economic areas (moreso Frankston North than Frankston proper, South, etc).

Harris said:
I plan to get those revalued this week or next to get an exact idea of the overall growth.
Click to expand...

I'm very keen to hear the results (plus property descriptions, purchase prices, dates, any improvements, etc).
 
Back on the thread, does anyone have any other long term (i.e. 25+ year) examples of growth in outer suburbs (i.e. 30km+ out)? Ideally same house comparisons.
 
Mark Laszczuk said:
How did I know that was gonna come up...

It's not about being able to service anything, all I did was compare the examples Harris posted.

Mark
Click to expand...

ok, I see now. As I'm very new to IP game, are you saying that the best is to buy most expensive investment property one can afford? Say if bank can lend me $1mil, you reckon I would be better of buying 1 property for $1mil in blue chip suburb compared to few properties in not so blue suburbs?

If not thats not the case, what was the actual point of comparing profits?
 
piNoob said:
ok, I see now. As I'm very new to IP game, are you saying that the best is to buy most expensive investment property one can afford? Say if bank can lend me $1mil, you reckon I would be better of buying 1 property for $1mil in blue chip suburb compared to few properties in not so blue suburbs?

If not thats not the case, what was the actual point of comparing profits?
Click to expand...

Noob, there is NO 'best'. With such a variety of suburbs and cities there is no definitive rule that ways inner city is better or whatever (though different sides would tell you otherwise). Read the arguments from both sides, and make up your own mind. You will find successful and bankrupt investors from both camps.
Alex
Alex
 
It all comes down to the indivdual investor and their strategy. There is no right or wrong.

Outer areas where the houses are cheaper may allow you to get into the market quicker, or in a bigger way (eg. 2 houses instead of only 1). I believe sooner or later, all subrubs in a city will go up - whether they are outer on inner. If you happen to get the timing right - that's a good bonus.
 
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