When I asked the Matusik Pulse Question – What influences your property’s performance the most over the medium to long-term? – the most frequent reply was – its location, with 62% of the vote.
Hmmm, now I find this level of response quite surprising; but then again maybe not, especially given that amount of airplay “location” gets these days in property investment magazines and via the internet.
But if you take a medium to long-term view – between 10 and 25 years – and especially if you are a passive investor rather than a renovator or speculator, then the statistical evidence is that most locations across Australia – and again, over the median to long-term – return close the same total residential investment returns.
WOW Matusik, you must be smoking the wacky-tobaccy! How could that be true?
Well, I undertook three studies to prove this point.
1. An analysis of house prices across our eight capital cities and major regional centres, from 1986 to date (i.e. 25 years) found an average capital gain of 7% per annum. Of course, some years were worse than others. But the long-term averaged out at 7% pa.
The largest variation from this mean was 2.5% (i.e. 4.5% pa for Hobart), but all other locations come in within 0.5% of this 7.0% average. For what it is worth, Brisbane was top of the tops – just – with a 7.4% annual average result. But that kinda wrecks my argument hey!
2. There is a definite property cycle and certain markets lead and others follow. When the results, as noted above, are graphed on a yearly basis, a clear trend is evident. In short “peaks head north; then west & south”.
History shows that the Sydney property market leads; followed soon by Melbourne; then the Gold Coast; then Brisbane; then Darwin; followed very closely by Perth; with the other capitals (in this order) following –Canberra, Adelaide and Hobart (sometimes).
The major regions experience an upswing about a year to 18 months after their respective capital city. The Gold Coast is the exception to this rule.
These days the order has changed a bit, with Perth coming in before Brisbane and the Gold Coast lagging behind.
But in general the cycle’s movement across the country still occurs and over the medium to long-term each location comes in with a similar annual growth result.
Of course, you can try to pick the bottom of the market and sell when it reaches its respective peak – but for mine the high cost of buying and selling residential property makes this a somewhat risky venture.
Many, who trade in such a way, don’t make as much return as those who take the longer term view. Remember, the eighth wonder of the world is apparently compound growth.
3. An analysis of 107 suburbs (that each average over 50 sales per annum) across Brisbane City – and when looking at the results over the last decade – found that they collectively averaged 12.5% per annum when it comes to total gross returns (i.e. capital gains at 7.8% pa and rental growth at 4.7% pa).
Just one in 8 (12%) of these 107 suburbs came in with a result greater or less than 1% from the 12.5% mean. And in most cases the higher performing suburbs in terms of the actual change in median property values – i.e. Fitzgibbon; Rochedale South; Eight Mile Plains; Acacia Ridge; Darra; Bald Hills & 17 Mile Rocks – were heavily influenced by the introduction of new, and more expensive properties, which artificially lifted end median values.
Yes, location is very important when buying a property, especially when it comes to the finer grain.
See my list below. But the results above suggest that too much time and effort is being spent by investors trying to pick the perfect location. Not enough time and effort, our Matusik Pulse survey results would suggest, is being spent by investors on reviewing product type and design. But that is for another Missive.
I do have some “location” based investment rules.
My seven location rules are:
- A minimum of five pillars of economic support. Avoid like the plague one, two and three horse towns.
- As a general rule, you cannot buy close enough to the GPO.
- You also cannot get close enough to ‘hard-core’ infrastructure – i.e. railway stations; hospitals; major retail centres and places of work.
- Buy in established areas not new ones. Existing amenity and character is an investor’s friend.
- Buy in areas where at least two-thirds of the existing residents are owner-residents. You want your investment property to have some serious appeal to the largest market – owner residents – when it comes time to resell.
- Avoid main roads; buy on the best side of the suburbs (they all have good and bad sides) and get the aspect/outlook right.
- And if that is all too hard, Google Walkscore, enter the street address and if the result is fewer than 80 out of 100, consider something else. And this, too, is another future Missive topic.
Michael is the director of independent property advisory Matusik Property Insights and writes the Matusik Missive which is free, however, reprinting, republication or distribution of any portion of this material, or inclusion on any website, is strictly prohibited without the written permission of Matusik Property Insights and may incur a charge.