Key takeaways
Investors should focus on selecting the right neighbourhood when making their property buying decisions, as socio-economic dynamics and lifestyle preferences shape today's property market.
80% of a property's performance is dependent on the location and its neighbourhood, and today's property investors and homebuyers are placing an unprecedented emphasis on lifestyle. These 'liveable' neighbourhoods with abundant amenities are where capital growth will outperform.
What makes a good neighbourhood? Generally, a good neighbourhood is determined by its physical location, suburb character and its close proximity to amenities such as a shopping strip, park, coffee shops, education, and even some jobs.
Over the next few years, our property markets will be more fragmented as high interest rates and inflation will continue to eat away at the average Australian's household budget. This will impact negatively on the lower end of the property market and cause little impetus for capital growth.
In the ever-evolving landscape of real estate there has been a notable shift in focus towards neighbourhood when home owners have been making their buying decisions.
And investors should similarly focus on selecting the right neighbourhood as this trend transcends mere aesthetic appeal or status symbols; it delves into the more profound aspects of socio-economic dynamics and lifestyle preferences shaping today’s property market.
Remember it wasn't that long ago that the coronavirus pandemic of 2020 and 2021 forced all Australians to reevaluate how we live our lives.
And it wasn't that long ago that offices were shut, and lockdowns were in place and that resulted in many of us working from home.
Now that our lives are back to "normal", people are likely to continue working flexible rosters and hybrid situations where we work at least part-time from home are here to stay.
This means gone are the days where our ‘home’ was simply the place we rest our heads and enjoy some downtime between work and our social lives.
If social distancing and the Covid-19 environment taught us anything, they taught us the importance of the neighbourhood we live in.
If you can leave your home and be within walking distance of, or a short trip to, a great shopping strip, your favourite coffee shop, amenities, the beach, or a great park, the recently implemented coronavirus restrictions might seem a little more palatable than if you had none of that on your doorstep.
That's why choosing the right neighbourhood is important for property investors
In short, it’s all to do with capital growth, and we all know capital growth is critical for investment success, or just to create more stored wealth in the value of your home.
Sure there is always the opportunity to add value through renovating your property or making a quick buck when buying well.
But these are "one off’s" and won’t make a long-term difference if your property is not in the right location because you can’t change its location.
This is key because we know that 80% of a property’s performance is dependent on the location and its neighbourhood.
In fact, some locations have even outperformed others by 50-100% over the past decade.
And today's property investors and homebuyers are placing an unprecedented emphasis on lifestyle.
It's not just about finding a place to live, but about discovering a place that aligns with one's way of life.
This is especially true in urban centers like Melbourne, Sydney and Brisbane where neighbourhoods offering a mix of cultural experiences, entertainment options, and leisure activities are highly sought after.
These ‘liveable’ neighbourhoods with abundant amenities are where capital growth will outperform.
What makes a ‘good’ neighbourhood?
A good neighbourhood means different things to different people, but there are some key factors that help to determine which locations have the potential to grow in value faster in the future.
Generally, a good neighbourhood is determined by its physical location, suburb character and its close proximity to amenities such as a shopping strip, park, coffee shops, education, and even some jobs.
It’s obvious then that today more people will want to be in a location where everything they need is in short 20-minute proximity - whether that is on public transport, bike ride or walks - to their home.
In planning circles, this concept is known as the ‘20-minute neighbourhood’.
Many inner suburbs of Australia’s capital cities and parts of their middle suburbs already meet the 20-minute neighbourhood tests, but very few outer suburbs do because there is a lower developmental density, less diversity in its community and less access to public transport.
The key criteria for a ‘good’ neighbourhood
Here is a list of 7 primary neighbourhood factors which have the potential to drive up property prices:
1. Close proximity to public transport
A key factor to consider is a suburb's connectivity and infrastructure.
Neighbourhoods with properties that are within walking distance of public transport, such as the train, tram, bus, ferry or light rail, are popular with buyers and therefore are likely to add value over the longer term.
2. Close proximity to schools
While the quality of local schools has always been a crucial factor in property investment, its importance has escalated in recent years.
Families are more willing than ever to pay a premium for properties located in top school zones, driving up demand and prices in these areas.
Interestingly during the property downturn of 2022, the top 10 primary and top 10 secondary school catchment zones nationwide all reported house price growth of at least 25% year-on-year.
3. Accessible amenities
As I have already mentioned, a neighbourhood with all the local amenities you could want - parks, shops, restaurants, cafes, gyms, the beach etc. - would fetch a premium price for its local properties.
And don't forget the green factor."
Green spaces, parks, and environmental quality are no longer just 'nice-to-haves'.
In the wake of increased environmental awareness, these features have become significant determinants in property investment.
Neighbourhoods that offer parks and recreational areas are seen as more desirable, reflecting a broader trend towards health and wellbeing.
4. A low crime rate
The sense of community and safety in a neighbourhood is a growing consideration.
It goes without saying that a property in a neighbourhood with a low crime rate will be more valuable than one with a high crime rate.
5. It’s well maintained
Neighbourhoods and homes which are well-maintained and clean indicate a level of community care that can help add value to properties in the local area.
6. Economic Stability and Growth
Strategic investors are also paying close attention to the economic stability and growth prospects of neighbourhoods.
Areas with a strong employment market, growing industries, and potential for future development are on the radar of savvy investors.
Neighbourhoods with planned upgrades could also be beneficial to property prices in the area.
For example, improved public transport and any plans to make the neighbourhood more visually attractive (improvement to the appearance of buildings or footpaths for example) could increase property prices.
7. Any historic charm
Historic charm brings unique character to a neighbourhood that is often in demand by buyers and in the long term buyer demand for this type of area has the potential to translate to higher property prices going forward.
It’s all about the neighbourhood
Neighbourhood has always been a key factor to consider when buying an investment property, and now it’s even more important.
I've always looked for desirable neighbourhoods in aspirational suburbs - locations where people aspire to live - which are very different to locations where the only reason people live there is that they can afford it.
Not only do we already know that location does the heavy lifting when it comes to capital growth, with some areas fetching 50-100% greater capital growth than other locations, but we’re also in unprecedented times which has forced us to adapt to a new normal.
This became the new normal when restrictions were put in place on our movement, social distancing has been implemented and your home now doubles as your office.
This also shone a spotlight on the neighbourhood we live in and what we have available at our fingertips.
As the world around us evolves and adapts, homeowners and investors must do the same and view properties with a post-pandemic eye.
Many inner suburbs of Australia’s capital cities and parts of their middle suburbs already meet a 20-minute neighbourhood test.
However, very few of the outer suburbs would do so.
But it's about much more than walkability.
For outer suburbs to become 20-minute neighbourhoods, then two key requirements must be met.
- Local development densities need to be increased, to say around 25-30 dwellings per hectare, which will better support local activity and services provision.
An introduction of a mix of uses into these neighbourhoods. This would bring more jobs and services close to where people live. They would also have a range of housing to support a mix of household types, income levels and age groups.
This combination is often known as density plus diversity. - Second, local public transport service levels need to be greatly improved.
And this will be very difficult for many outer suburbs to achieve.
At the same time, they won't meet the aspirational and desirability criterion I mentioned above.
Our property markets will be more fragmented
Over the next few years it is likely that high interest rates and inflation will keep eating away at the average Australian's household budget for some time making the property less affordable for many.
Moving forward our property market will be much more fragmented.
If you think about it, certain demographic segments will find the rising cost of living due to inflation and higher rents or higher mortgage costs at a time when wages are not keeping up with inflation will either stop them from getting into the property markets or severely restrict their borrowing capacity.
This will have an impact negatively on the lower end of the property markets which will also be affected by the fact that many first-home buyers borrowed to their full capacity and will have difficulty keeping their mortgage payments up at the time of rising interest rates or when their fixed rate loans convert to variable rates.
In other words, there will be little impetus for capital growth at the lower end of the property market
That's why I would only invest in areas where the locals’ income is growing faster than the national average.
These tend to be the "established money" areas or gentrifying suburbs.
In these locations, locals will have higher disposable incomes and be able to and are likely to be prepared to pay a premium to live in these locations.
Many of these locations are the inner and middle-ring suburbs of our capital cities which are gentrifying as these wealthier cohorts move in.
There are great investment opportunities in these suburbs in houses and townhouses.
