10 year growth, prime inner vs outer, APM data, Feb 99 - Feb 09.

[House_Keeper]

Interesting thread.

Statistics are always hard to interpret, as they can be provide different results using different time period or samples.

Personal & empirical experience are a lot more tangible.

I have two property in Sydney. One in the inner west & one further out. In the last 10 years, the one in the inner west has outperformed the other one in terms of capital growth by a long shot.

I had a property in Brisbane, which was 15km from CBD. I sold it 3 years ago thinking that most of the "growth" had occurred, and that it would go back to be a low-growth area. Yet it increased by another 30%. That taught me a valuable lesson: don't sell an asset that requires virtually no efforts to hold, and increases in value over time. It also showed me that you can be totally wrong when guessing future capital growth. It's not as simple as it seems, & certainly not as straighforward as the property spruikers make it up to be.

What makes it even more difficult is that the last 10 years may be not a good predictor of the next 10 years. Sometimes it can go the other way: whatever area has risen much more strongly than its neighbours is probably less likely to outperform in the short to medium term.

So, with all theses confusing statements combined, I like the idea of purchasing property that are cheaper because:

• better cash flow -> better serviceability -> can grow portfolio quicker

• lower risk in terms of price drop in hard times

• lower cgt bill at the end. Easier to spread cgt over several years

• lower land tax bill if you spread across states

• lower risk & volatility overall if you spread across states

I believe that theses are significant advantages that outweigh any guesses about future capital growth.

Cheers,

 

[sash]

The below summarised my strategy well.....

There will be other "experts" who will disagree with me, of course!

My story in regards to property has been mostly buy and hold. But in the last 2 years....I have also decide to take profit in properties that have grown a lot but will be difficult to sell in bad market. I sold that one last year.

I will shortly also sell a property that has underperformed as the "opportunity" cost of the money there is also a consideration.

In my view....buying investment property and growing a sizeable portfolio is like running a business.

So, with all theses confusing statements combined, I like the idea of purchasing property that are cheaper because:

• better cash flow -> better serviceability -> can grow portfolio quicker

• lower risk in terms of price drop in hard times

• lower cgt bill at the end. Easier to spread cgt over several years

• lower land tax bill if you spread across states

• lower risk & volatility overall if you spread across states

I believe that theses are significant advantages that outweigh any guesses about future capital growth.

Cheers,

 

[DavidMc]

I ran the results again factoring in depreciation on a 2005 constructed villa unit.

The difference in the end equity result was much smaller than I thought, but the cashflow was a sizeable difference. Just a little more than double over the 20 year period.

 

[forumite]

Most people simply look at the inner suburbs and see that it has grown from say 500k to 650k in 5 years which represents a a 30% growth rate in a premium location. Note that due to the volatility the price of this property would have gone to 750k before dropping back down to 650K. Also rents would have increased from about 350pw to about 450pw about a 4.2% rents...still does not cover the mortgage.

As an example they don't see that in Melbourne they would have paid about 28K in acquistion costs (stamps, legals, etc.) plus they would have had about 50k worth of negative gearing holding costs post tax benefits. So based on this it as costed about 78k to hold. Assuming inflation is 4%...in 5 years you are actually going backwards in the premium property.

Lets use an example which is near and dear to me....lets use a example of a house bought for 140k in Werribee 5 years ago. This house is now worth about 220k...very little voltatility because 140k is now land value. This represents about a 50% gain. The holding costs is probably 10K and pruchase costs about 6K. The reason for low holding costs is because this house would be signifantly positively geared as rents would have been increased from 160pw to aobut 260pw in 5 years.

Even with inflation you are better off on the latter purchase.

This in my opinion is what separates investors from the amateurs...because most do not work at the cost of holding vs what they get back in capital gains.

Enlightening!

 

[DavidHooper]

I've always wondered why people haven't taken the Wakelin gang to task for their neverending mantra that inner suburb investments are superior.

 

[units4me]

The way I see it, lots of people hold their (Wakelins) opinion in very high regard, due to their exposure on ABC radio etc. Sometimes when i hear her, I just wanna smash my radio.

Typical type advice given to the impressionable plebs is "sell your 3 unit development site in the outer burbs or regional, and with the funds, buy a 1 bedder in Elwood".

And they listen!!!

 

[DavidMc]

Yes I also was invited to 'review my portfolio and perhaps dispose of underperforming property that is benchmarked against the median'.

Based on that logic I'd love to hear them explain why I should keep my Toorak place when it's gone backwards so much in both growth and holding costs (-$20k pa on a 2 bedroom unit) and sell off my Berwick and Narre Warren South properties that have increased in value another 11-16% (bog standard H&L package built 6 years ago in a bog standard estate).

I couldn't be bothered wasting the time.

Not to mention one of them is also $5k postive cashflow too. So if you add growth + yield they're miles ahead.

Berwick just made it into Terry Ryders Victorian Top 10 hotspots too. In the report he mentinoed Berwick has never had a year of negative growth for the last 10 years.

 

[sash]

Wow David!!...20K....is that even after the rates dropped in early 2009??

I am also hearing great things about Berwick and Narre Warren....solid middle class family areas with newer type of homes. I understand that not much land left and if there is it is getting reasonably expensive due to demand.

Terry Ryder rarely gets it wrong.

You may want to show a poster called DeeHwa your stats for Toorak....as he believes CG growth will be far superior to any outer suburb.

I used exactly your analogy...just different surburbs (Werribee/Hoppers Crossing)....

Yes I also was invited to 'review my portfolio and perhaps dispose of underperforming property that is benchmarked against the median'.

Based on that logic I'd love to hear them explain why I should keep my Toorak place when it's gone backwards so much in both growth and holding costs (-$20k pa on a 2 bedroom unit) and sell off my Berwick and Narre Warren South properties that have increased in value another 11-16% (bog standard H&L package built 6 years ago in a bog standard estate).

I couldn't be bothered wasting the time.

Not to mention one of them is also $5k postive cashflow too. So if you add growth + yield they're miles ahead.

Berwick just made it into Terry Ryders Victorian Top 10 hotspots too. In the report he mentinoed Berwick has never had a year of negative growth for the last 10 years.

 

[traveller]

My real example, not stats from somewhere:

Bought Land in Narre Warren in 2002- Settled in 2003 for A$62000. Today's estimated price by agents is 230000.

At that rate i never even bothered building on it...Just costs me A$700p.a to hold. If i built it now it will be seriously cash flow positive as the land is paid off.

Icing on the cake is that i bought two blocks at that price each....

 

[our obsession]

Incidently the link I posted has expired, Clever Belu has the data link now at:

http://www.thedatahotel.com.au/median house prices by suburb.pdf

 

[Peter Parker]

I've always wondered why people haven't taken the Wakelin gang to task for their neverending mantra that inner suburb investments are superior.

Oh they/we have, plenty of times, eg

http://www.somersoft.com/forums/showthread.php?t=19143, http://www.somersoft.com/forums/showthread.php?t=34338 &
http://www.somersoft.com/forums/showthread.php?t=36459

As for reasons why this is treated as gospel on the ABC and in the so-called quality media, I offer the following:

1. Dale Carnegie quote: 'those convinced against their will are of the same opinion still' http://www.whatquote.com/quotes/Dale-Carnegie/12519-Those-convinced-agai.htm

2. Monique is female, intelligent, cultured and smugly inner-suburban. A better fit for the ABC's core AB Age-reading demographic (and all their biases) cannot be found. Being able to obtain a spot on the ABC is business genius.

No less than Pauline Hanson in her heyday, she succeeds because she appeals to the prejudices of the target group. It's just that her prejudices (shrewdly confined to certain types of property) do not repel (or threaten) the educated middle-class like Hanson's statements on race, immigration or international finance.

3. Monique is clearly not a shonk, even though she suffers from a limited outlook and a dangerously concealed naivity. Her knowledge about a certain subset of metropolitan property (maybe 10% of the total) is rather good. If one set her an examination on property matters, she would score well. Some of her advice re property selection, if stripped of the location aspects, is good. And for certain types of investors (generally professionals in the top 10-20% of income earners) her approach has been proved to work.

The main problem is that her ABC slot does not carry the warning that if your job pays less than $100k pa (more for multiple properties) then you must switch off now. And so she plays them like a fish on a hook, with a one-size-fits-all approach that builds up listener dreams, only to be deflated as soon as one goes to a bank and/or does serviceability calculations based on real figures.

Like Hanson, Wakelin combines a narrow outlook with an ability to make sweeping statements. However unlike Hanson, who never presumed professional policy expertise, Wakelin claims such expertise in her subject of property. This claim is legitimate but only over a narrow range of locations, properties and individual financial circumstances.

The fact that this narrowness is (a) never dislosed to listeners (beyond a vague disclaimer), (b) goes unquestioned by ABC presenters who have even less property knowledge, (c) is combined with an all-knowing delivery style and (d) amplified by the credibility of the ABC makes her potentially dangerous to those who haven't read widely or found more diverse opinions on forums such as Somersoft.

 

[Harris]

Excellent post Peter.

I would also put Metropole into the same category as Wakelin.

Harris

Oh they/we have, plenty of times, eg

http://www.somersoft.com/forums/showthread.php?t=19143, http://www.somersoft.com/forums/showthread.php?t=34338 &
http://www.somersoft.com/forums/showthread.php?t=36459

As for reasons why this is treated as gospel on the ABC and in the so-called quality media, I offer the following:

1. Dale Carnegie quote: 'those convinced against their will are of the same opinion still' http://www.whatquote.com/quotes/Dale-Carnegie/12519-Those-convinced-agai.htm

2. Monique is female, intelligent, cultured and smugly inner-suburban. A better fit for the ABC's core AB Age-reading demographic (and all their biases) cannot be found. Being able to obtain a spot on the ABC is business genius.

No less than Pauline Hanson in her heyday, she succeeds because she appeals to the prejudices of the target group. It's just that her prejudices (shrewdly confined to certain types of property) do not repel (or threaten) the educated middle-class like Hanson's statements on race, immigration or international finance.

3. Monique is clearly not a shonk, even though she suffers from a limited outlook and a dangerously concealed naivity. Her knowledge about a certain subset of metropolitan property (maybe 10% of the total) is rather good. If one set her an examination on property matters, she would score well. Some of her advice re property selection, if stripped of the location aspects, is good. And for certain types of investors (generally professionals in the top 10-20% of income earners) her approach has been proved to work.

The main problem is that her ABC slot does not carry the warning that if your job pays less than $100k pa (more for multiple properties) then you must switch off now. And so she plays them like a fish on a hook, with a one-size-fits-all approach that builds up listener dreams, only to be deflated as soon as one goes to a bank and/or does serviceability calculations based on real figures.

Like Hanson, Wakelin combines a narrow outlook with an ability to make sweeping statements. However unlike Hanson, who never presumed professional policy expertise, Wakelin claims such expertise in her subject of property. This claim is legitimate but only over a narrow range of locations, properties and individual financial circumstances.

The fact that this narrowness is (a) never dislosed to listeners (beyond a vague disclaimer), (b) goes unquestioned by ABC presenters who have even less property knowledge, (c) is combined with an all-knowing delivery style and (d) amplified by the credibility of the ABC makes her potentially dangerous to those who haven't read widely or found more diverse opinions on forums such as Somersoft.

 

[our obsession]

Great post Spiderman. Again. Balanced, well expressed information/thoughts.

 

[DavidHooper]

I agree. Absolutely excellent analysis by Spiderman.

 

[RedCat]

This has been a great read so far - thanks to all for their contributions. I'm planning to get a mixture of inner, outer and regional property and reading this made me feel more positive about the plan - being that I am a true inner city girl.

 

[Peter Parker]

Sometimes ten years isn't quite long enough - some demographic changes can be over a 30 year period or more. In the case of inner suburbs, it's been a shift from Australian born working class to postwar migrants to gentrification (sometimes via bohemians).

Spruikers of inner suburbs often talk as if their capital growth has been superior to elsewhere since the year dot and that this trend is unstoppable for ever more.

However studying history allows more measured consideration free from financially vested interests (although historians may have political, aesthetic and cultural biases).

This is a great history of Prahran, as put out by the council:

http://www.stonnington.vic.gov.au/resources/documents/Chapter_3_Wilde.pdf

The history of Prahran back then looked like a ghetto - losing jobs and losing people.

And on property prices: 'relative housing prices in the inner suburbs fell'. So if you bought in the outer suburbs you'd have had higher capital growth. I will not claim this is true today, and there is nothing wrong with Prahran, but it does bust the myth about inner property always outperforming.

And depopulation (the same problem that Dallas & Cleveland have today) was thought such an issue that housing commission towers - no matter how ugly or socially undesirable to the residents - were built. The Age might say today they're ugly today but back then this was thought by propertied interests to be the best thing.

 

[Belbo]

Very interesting thread indeed!

I'm someone who has definitely swallowed the ínner is better' mantra hook, line & sinker all along.

Reading this has certainly been a wake up call.

I'm not sure I'm convinced that outer can match inner (it seems so counter-intuitive!), but it's definitely shaken my prejudices.

I've got some thinking to do now . . .

 

[DavidMc]

Whaddya know...

Outer suburbs stay hot in cooling market
SIMON JOHANSON
July 17, 2010

Dandenong, Rosebud and Broadmeadows trumped Melbourne's leafy eastern suburbs to record strong price growth amid signs the unseasonably hot auction market was slowing.

Top-end suburbs including South Yarra, Surrey Hills, Middle Park and Toorak experienced negative growth but overall Melbourne's median house price still grew by 8.5 per cent between April and June.

Quarterly figures released by the Real Estate Institute of Victoria show the median price in South Yarra fell 26.4 per cent to $1,287,500, down from $1,750,000 in March.

But the median price in multicultural Dandenong was up 31.5 per cent, bayside Rosebud 18 per cent and Broadmeadows by 16.4 per cent.

http://theage.domain.com.au/real-es...tay-hot-in-cooling-market-20100716-10ec0.html

 

[Peter Parker]

Just turned on the radio and (Sasson) Wakelin still at it, harder than ever.

This time telling listeners that Cheltenham is the end of the earth.

IP owners there should sell up and buy a 1br in St Kilda, Northcote or even an inner Bendigo cottage.

Because it apparently has no services or facilities.

Despite all the objective evidence (and a correction by a caller).

If she wanted to pick a suburb to compare unfavourably, Cheltenham was a bad target; it actually has an unusual concentration of amenities within 2-4km.

Eg Southland, numerous schools at Mentone, the beach etc. Also the trip into town on the train (whose express services have recently been increased) takes no longer than trams from their outer parts.

One could equally make the case that Cheltenham offers good facilities for its price class rather than trying to compare apples with oranges, eg with Toorak etc.

Not that facts count when a spruiker holds sway!