Population growth and property price growth | Pete Wargent

location street phoneI often get asked about my favourite suburbs for buying property, but I’m not really that keen on spouting general advice, since what is right for one person may not be right for another.

Moreover punters might merrily go off and buy a poor property in that area – such as a dwelling on a main road or with sub-optimal features – and then subsequently wonder why they don’t experience that elusive “capital growth”.

For property buyers in Brisbane, be wary about two things in particular:

(i) poor outer suburbs with low household incomes and rising unemployment

Ask genuine local experts with decades of experience in the Brisbane market and they will tell you that there can sometimes be problems with ‘investing’ in Brisbane’s sprawling outer.

That is, that there are so many blocks which can be developed in outer areas where demand is low – thousands upon thousands of them – that not ever in my lifetime will there be significant upwards pressure on land prices in some such locations.

Confidence tricksters are often at pains to point to “rising median prices” in individual years, of course, while conveniently neglecting to mention that such ‘fluctuations’ are often driven entirely by the immoderate tolls charged upon their own new developments.

Meanwhile the actual capital growth experienced on the like-for-like resale of individual dwellings remains stubbornly close to zilch in real terms.

(ii) inner city suburbs which are set to be flooded with a glut of new apartments

There are a number of these suburbs and I’ve covered on this blog before which suburbs are among the highest risk of apartment oversupply.

Whatever you do, do your research before purchasing a unit, because there are a number of suburbs which will imminently experience an unprecedented glut of attached dwellings (refer below chart):


Population growth

sardine population etcOne of the factors in driving property price growth which is terribly misunderstood is that of population growth.

The meme that “population growth is good” may be absolutely true at the capital city level and it most certainly beats the alternative – yet it can also be awfully misleading at the suburb level.

Take the example of Deception Bay, which is about 32 kilometres from Brisbane Central Business District, and experienced a very strong population growth of 15 percent between 2006 and the 2011 Census.

Did this very strong population growth lead directly to a boom in prices?

Well, no, median house prices have declined over the past half decade years by 4.4 percent and median unit prices by 9.3 percent – suburb median prices aren’t always a reliable measure, but a boom there is not.


While there has been some talk of a market uplift in recent times, the greatest number of households remain in the $30,000 to $50,000 per annum income bracket, there is little scarcity value in the availability of land and therefore building plots have remained relatively cheap.

Most pertinently, local unemployment rates are threatening to spiral out of control, rising by more than 50 percent across the past five quarters alone.

Deception Bay – Unemployment rate

  • September 2013 – 9.1 percentjob employment
  • December 2013 – 10.6 percent
  • March 2014 – 12.0 percent
  • June 2014 – 13.1 percent
  • September 2014 – 13.8 percent

Similar labour market challenges are facing some of Adelaide’s fringe suburbs as well as many other parts of regional Australia.

Although over the very long term the price of most dwellings will eventually rise in nominal terms, you may want to see these concerning unemployment trends reverse before piling in to buy property which superficially appears to offer “value”.

Don’t be duped into believing that there is an effective lower bound on property prices in cheaper regions. Murphy’s Law holds that we will experience a recession at some point in Australia, so think carefully about what locations you want to be owning property when that happens.

Land scarcity drives price growth

houses suburbThink about the dynamics of investment carefully.

While interest rates declining from 17 percent to 5 percent within the space of a decade was a dynamic which allowed dwelling prices almost everywhere across urban Australia to rise strongly in the 1990s, nothing similar is going to be repeated any time soon.

Even in the unlikely event that median plot prices in outer suburbs soared by, say, 50 percent, from $100,000 to $150,000, this is still only going to add $50,000 of capital value to a median priced $300,000 house, which is a paltry 16.7 percent growth in total asset value.

Are inner suburbs necessarily “better”?

Are inner suburbs with strong population growth any better? No, not necessarily.

Take the Brisbane suburb of West End as an example, where the population roared higher by 30 percent between 2006 and the Census of 2011, or South Brisbane where similar circumstances exist.

The principal reason that the population can grow and is growing so rapidly, of course, is that industrial and commercial sites are being rezoned all over the show for new high-density apartment buildings.

Would I buy a property there? Not a new off-the-plan unit, for mine – there are hundreds and hundreds of the things being built and there will be a significant oversupply which will lead to steepling vacancy rates and stalling rents.

Some inner suburbs can perform over time

From time to time articles surface contemptuous of the notion of property investment in inner suburban areas such as New Farm in Brisbane, or alternatively some of Sydney’s prime inner suburban locations.

It is inarguable of course, that over discrete periods of time growth can be sluggish in suburbs such as New Farm, but over time quality assets do perform exceptionally well (how often do you hear someone say: “I wish I hadn’t bought that well-located property near the city and held it for the long term?” – answer: never).

New Farm robust

While I’m not one to be drawn into apotheosis, and all suburbs have their good and bad properties, right in cue in 2014 median houses prices in New Farm boomed by 24 percent leading to capital growth over the preceding years of 40.4 percent, or more than $300,000.house seesaw coin tax

Unit prices in New Farm have lagged a little reflective of a lesser scarcity in some of these property types, but are still up very strongly over recent years.

What are the reasons that New Farm house prices have been able to rise by more than 40 percent in five years whilst so many outer Brisbane suburbs have performed dismally since we hit “peak household debt”?

Yep, proximity to the city and employment but without major roads or rail links that can undermine value growth, while “most of the best cafés, restaurants in Brisbane are located in New Farm. It has the best park, walkways and fashion shopping outside of the CBD…” and so on.

Meanwhile, those so-termed “low growth” inner Sydney suburbs aren’t doing too shabbily either.

My inner west picks in Sydney have generally put around 50-60 percent capital growth on the board over the past six years or so – which isn’t too shoddy in the context of some truly desperate mining town and other regional recommendations promoted by some experts.

The role of population growth

 

It is important to understand that while Greater Brisbane has experienced very powerful population growth – the city headcount increasing by well over 400,000 or 25 percent in the decade to 2013 – the suburb of New Farm itself has not.

The statistics show that the population of New Farm in 2006 was 11,244 people and the time of the 2011 Census the population of the suburb had only increased to 11,337 – so the suburb only had a stable population in the area during that time.

[sam id=40 codes=’true’]

Of course this reflects that the suburb is landlocked and largely built out, thus effectively capping the supply of new builds.

This is the key point: the lack of population growth within the suburb reflects the lack of available land for development and an effective restriction on building approvals in New Farm, which has in turn capped significant new supply of properties.

While there will always be an element of “frictional” unemployment and rates will never decline to zero, the unemployment rate in New Farm has declined to be below 4 percent.

Although demand is outstripping supply as the size and wealth of Brisbane’s population grows, it nevertheless remains vital to favour property types with high land value content and scarcity value on quiet streets, while fulfilling a range of other criteria which separate the great investment properties from the average-to-poor equivalents.

Understanding demographics and suburb life cycles

Understanding the life cycle of a suburb is also paramount.

The predominant age group in New Farm is 25-34 years, with 57 percent of dwellings comprising childless couples (32 percent) or lone households (25 percent), and some 56 percent of properties currently rented.

cycle arrows-smallIn terms of income distribution, the greatest number of households have incomes in the $130,000 to $180,000 bracket, largely driven by young professionals in dual-income households. Locals in surrounding suburbs perceive New Farm to be “yuppyville” (their words not mine).

Why will prices be driven higher over time? Partly this is because today’s 25-34 year old professional renters earning $130,000 to $180,000 will also be tomorrow’s $180,000+ executives.

More pertinently it is because for every parsimonious chap like me who believes that it makes more sense to live across the drink where property might cost a third less, there are half a dozen spendthrifts in the mould of my better half who insist that experiencing the ultimate “lifestyle choice” of New Farm is worth paying considerably more for.

If this blog is terminated forthwith, the better half has probably read this and severed my fingers.

If on the other hand the blog continues, in all likelihood I’ll be residing in New Farm (guess who makes the key marital decisions?).

Park life

Since I’m in the area on many weekends anyway, I thought I’d take my camera down to the New Farm Park markets for a snout around to give you a feel.

In case you were wondering, no I didn’t do any salsa dancing – absolutely nothing happens on a Saturday morning before I’ve had a large coffee, and certainly not any Latin American “cha cha cha”.

The building in the backdrop in the above snap is the Brisbane Powerhouse which naturally enough fronts the Brisbane River, close to the New Farm CityCat ferry terminal which transports residents at the south-eastern end of the suburb to the city.

The size of New Farm is approximately 3 square kilometres and the suburb has attractive parkland covering 15 hectares, and an array of very popular shops, cafés and restaurants.

As you can see below, the Central Business District is located only two kilometres to the west making the suburb extremely convenient for financial services professionals and their ilk.

 

If exercise is your thing, there is a “Zumba” class and various other outdoor pursuits on weekends.

It can be sticky up here in the summer months, however, so perhaps a latte and “Tai chi” or the 10.30am “laughing club”are more appropriate activities for Queensland’s humidity.

Caveat emptor

house inspect

It should almost go without saying that you should not rush out and buy property in a riverside Brisbane suburb without researching which streets are at risk of flooding.

Unfortunately, this probably doesn’t quite go without saying, so here goes: “don’t rush out and buy property in a riverside Brisbane suburb without researching which streets are at risk of flooding”.

In order to prevent a repeat deluge at the southern or park end of New Farm, the Brisbane City Council has been busily undertaking the installation of backflow valves and other engineering devices which are comfortably beyond my technological ken.

Remember, property buyers would do well to think often of Murphy’s Law – that is, if something can possibly go wrong, eventually it probably will.

Ergo, don’t buy property in the high-risk zones which might be flooded.

The artwork pictured below denotes just how high the river can run when it rains solidly for days on end and the dam becomes over-full.

New Farm is an outstanding supply-constrained lifestyle suburb perched on the bend of the Brisbane River, which in my opinion remains primed for long term capital growth, but only for the right property types, so ensure that you undertake oodles of research first.



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Pete Wargent

About

Pete Wargent is a Chartered Accountant, Chartered Secretary and has a Financial Planning Diploma. He’s achieved financial freedom at the age of 33 - as detailed in his book ‘Get a Financial Grip – A Simple Plan for Financial Freedom’. Pete now manages his investment portfolio, travels and works as a consultant in the finance industry from time to time. Visit his blog


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