Some people base their buying decisions on an area's capital growth performance. While this might work in the early stages of a boom, it is only in hindsight that people pick this. Above average performance is often not sustained (ie revert to mean), sales data is imperfect, there are significant time lags and the poor reputation of a suburb can conceal value. The basic definition of value is what you get compared to what you pay. As investors who want to make money (or at least preserve asset value) under all market conditions buying value increases the chance of success and reduces risk. COMPARING FOR VALUE The simplest method of assessing value is making comparisons. Buyers do this all the time. 1. Eg property A might be a similar home in the same area as property B but is $30k cheaper, so represents better value. 2. Or suburb A offers all the facilities of nearby suburb B and has similar housing stock but is on average $30k cheaper so may represent better value. SUCH A THING AS AN $X VALUE SUBURB Let's ignore housing stock and talk about a suburb's amenity, ie 2. above only. And let's suppose we can reduce that amenity to a single dollar amount so suburbs can be readily compared. I believe there are such things as $200k suburbs, $400k suburbs and $800k suburbs. An $800k suburb will obviously have more amenity and appeal than the average $400k suburb, which in turn will be 'better' than a $200k suburb. One could use median house prices as an anchor to guage this, but this merely deals with tho status quo of existing house prices which are socially-determined. It does not deal with incontestible facts. Also an enclave of newish townhouses (asking $300k) in a $200k suburb does not change the fact that it's a cheap suburb with $200k facilities. I am of the view that it is possible to use facts to determine if a suburb is a $200k, $400k or $800k. These can be found by looking at a small number of things that accounts for most of the differences between suburb value. Equipped with this it is possible to compare this to house prices in the area. After allowing for property-specific factors like a discount for units (lower land value) or hovels (repairs needed), it should be possible to define value as being a property bought for less than the suburb's value. DETERMINANTS OF SUBURB VALUE The three biggest factors (in Melbourne) that seem to explain a suburb's value are: a. Proximity to the CBD b. Proximity to water (bay or river) c. Tree cover (tree size or rainfall) If you were told only these factors about a suburb then it should not be too hard to predict its value within (maybe) 20-30% in many cases. Tree cover was included to build in a skew to the eastern suburbs versus the north and west. To make the assessment finer some lesser order factors are needed. I would suggest: d. Prestige state or private schools (0, 1 or >1) e. Transport (bus, frequent bus/tram or rail) f. Other local facilities including shopping and recreation SCALES AND WEIGHTINGS The next thing is to assign a scale to each - say 0 to 5. Then a weighting to each, noting that the first three have the highest weighting (weighting factor = y which might be 2) and the second three have lower weighting (weighting factor = z which might be 1). Including these would aid accuracy - maybe 10-20%, but in the end you need a single dollar answer for each suburb (or precinct of suburb). x is a final factor to standardise to a reasonable price. It doesn't matter what it is but it must be the same across all suburbs. Suburb Value might equal x(y(a + b + c) + z(d + e + f)) Fine tuning would involve a weighting factor for each variable - eg proxmity to the city might be more significant than tree cover. It is emphasised again that this is 'suburb value' not 'house price' in that suburb. The former needs to be adjusted for things like building size, quality, land area etc to get a reasonable 'fair house price' estimate. USE The main utility of this is to identify suburbs that are high amenity (based on the above six factors) but comparatively cheap so represent good value. Conversely it might indentify expensive suburbs that are low amenity so are best avoided. The market is imperfect so amenity might not always be factored into prices and that creates opportunities as the market 'discovers' the amenity/value (you knew when you bought thanks to an assessment like the above) and pushes prices higher. Some examples may follow - if I can be bothered as this post is too long already!