Why the inner suburbs are the place to invest according to the RBA


If you’ve been following my writings you’ll know I strongly believe the inner and middle ring suburbs of our capital cities are the best place to invest in property.

Fact is: not all land is created equal.

Some suburbs will be more popular than others, some areas will have more scarcity than others and over time some land will increase in value more than others.

And of course these are the areas property investors should target, as that’s where they’ll get above average capital growth.

So it didn’t surprise when Luci Ellis, head of financial stability at the RBA recently confirmed that capital growth has been stronger in the inner suburbs of all our capital cities than in the outer suburbs.

Along similar lines a while ago Dr Marcus Spiller, a principal at SGS Economics and Planning, warned that Melbourne could soon have a dual economy: a permanently prosperous inner city, surrounded by ”client” suburbs where jobs are hard to get to and lack security.

He said urban sprawl has created an extreme advantage for those who live closer to the CBD and this has also created a widening disparity in housing values with properties closer to the CBD growing faster

Spiller suggested that the continued spread outward of the ”already super-sized” Melbourne could leave residents in these new outer suburban areas at risk of ”profound social exclusion”.

A tale of two cities

But back to what Dr Ellis from the RBA recently had to say; here’s a summary of part of her speech. She said:

The reality of property as place

For property, the physical reality is that it endures for a long time and is fixed in place.

Because property endures, price is determined by demand and supply for a stock of property.

The flow of new supply is generally small compared with the stock.

Even more important than its endurance, to my mind, is that property is fixed in place.

The Deputy Governor recently talked about the general fascination with land.

It is true that if you take the price of land as being the difference between the total price of the property less the replacement cost of the building, it is land prices that have risen relative to incomes (Lowe 2015).

But land is two things: it is both space and place.

Many have observed that Australia has plenty of the former.The reality of property as place

But I think the lesson of past booms as well as recent times is that it’s place – location – that really matters.

If we think back to boom–bust episodes of the past, whether in land for new development, railways or prime office buildings, in every case you can see people trying to get their hands on the best locations, to take advantage of whatever future economic outcomes they expect.

The same holds true for more recent times, and for residential property.

Prior work at the Reserve Bank has shown that location explains far more of the variation in individual property prices than block size.

Yes, some people like a bigger garden, for privacy or to enjoy in other ways.

But being in the ‘right’ kind of neighbourhood with the best amenities, close to commercial centres and other services, is more important to most people, if their willingness to pay for it is any guide.

The physical reality is that the supply of good locations is more or less fixed in the short term.

So any sizeable boost to demand cannot be fully absorbed by more supply.

The newly built property is simply not the same as the existing stock, because it’s somewhere else.

We should therefore not be surprised that strong demand for property does not just change the general price level for that asset, but also its distribution.

We can see this in the increase in prices of inner-ring properties relative to those further out, especially in Sydney…

House price gradient

Over the much longer term, the set of good locations does change.

Improving transport infrastructure can certainly help here; the process of gentrification is probably even more important.

To give a few examples, in the space of a few decades, suburbs like Paddington, Newtown and Balmain in Sydney or Fitzroy and Northcote in Melbourne went from ‘scary’, to edgy, to trendy, to pricey.

The housing stock was also renovated in this process, but most of the price action can probably be explained by the rising relative price of those locations.

You can read Dr. Ellis’ full speech here.

Inner or Outer Suburbs

Of course there is nothing new about this…

I remember reading a study from

Inner or Outer Suburbs

Macquarie Bank about 10 years ago showing that (in general) properties closer to the CBD and closer to water increased in value faster than those further from the CBD and further from water.

And this general trend has also been confirmed by a paper by the Australian Housing and Urban Research Institute which found that both in percentage terms and in absolute terms over the long haul suburbs located reasonably close to the CBD, where demand is high, close to employment and where the most people want to live and where there is no land available for release, outperformed the outer suburbs.

“Housing markets, which were once relatively egalitarian cross Australian cities, have become polarised”The paper explained:

“The homes affordable to present (and future) lower moderate income home buyers are now confined to the outer suburbs and will only increase in value at slower rates compared to housing in the more expensive inner and middle suburbs – effectively trapping poorer households on the edges of our cities.”

Now this brings up a heap of social arguments.

The process of gentrification and rising prices may have locked a generation of younger people out of inner city housing and it is likely that the gap will only widen over the years.

I’ll leave discussion of the remedy for this to the politicians and town planners, but the conclusion for property investors is that if you want to own the type of property that will outperform the averages, the inner and middle ring suburbs are the place to be.

It’s the same all over the world

It’s the same all over the world


Source: www.ahuri.edu.au

Go to any major city in the world – London, Paris, Vienna, Los Angeles – and you’ll find that the wealthy people tend to live within 10 – 15 minutes drive from the CBD or near the water.

Why is this so?

The cynics would say because they can afford to.

And in part that’s true.

In general the more established suburbs with better infrastructure, shopping and amenities tend to be close to the CBD and the water and that’s where the wealthy want to and can afford to live.

And they’re prepared to pay a premium to live there.

And today in Australia these locations are close to where our economic hubs are as more and more of our higher paying jobs will be in service industries located close to the big CBDs.

Gentrification has helped

One of the significant changes to occur in Australian cities over the last 50 years and which has pushed up inner and middle ring suburb property values is gentrification.

Interestingly this wasn’t caused by deliberate planning policy, but resulted from a set of demographic changes that have occurred in most major capital cities around the world.

When I was young (in the 1950s and 60’s) the inner suburbs of Melbourne and Sydney (say as 5 km from the CBD) were relatively dense mixed-use working class suburbs with a mixture of small terrace houses, pubs and factories.

Accommodation in these suburbs was relatively cheap and attracted migrants who brought with them their culture including delicatessens, pizza shops and cafes.

Over the years manufacturing moved from these inner suburbs to the outer suburbs and many of the migrants and inner city blue-collar workers also relocated to the suburbs where they could buy a larger home with a sizeable front and back yard.

The exodus of industry, migrants and many workers made way for gentrification of our inner suburbs where initially house prices and rents were cheaper than in the suburbs.

Later, our changing demographics with declining household size, in part because we we’re getting married later and having fewer children, meant that small inner suburban dwellings or apartments provided ideal accommodation for the expanding cohort of professionals who worked in or close to the CBD.

Gentrifiers were initially drawn to these inner suburbs by the diversity of jobs, educational opportunities and lifestyle and this trend continues today as more and more Australians are swapping their back yard for balconies.

The Bottom Line

No doubt the argument will continue to rage.

Some will continue to recommend investment in the outer suburbs because they’re cheaper, more affordable and the yields are a little higher.

And all this is true.

But remember over the longer term, rents tend to grow more substantially in landlocked suburbs where demand is the strongest and capital values increase more.

In my mind there is no question that the best locations to invest for long term capital growth are the inner and middle ring suburbs of our major capital cities where the jobs are, where wages growth will occur, where most people want to live and where there is no land available for release.

Not sure where to start?

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Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and one of Australia's 50 most influential Thought Leaders. His opinions are regularly featured in the media. Visit Metropole.com.au

'Why the inner suburbs are the place to invest according to the RBA' have 4 comments

    Avatar for Michael Yardney

    September 18, 2015 David Robinson

    This article seems predominantly based on houses. Metropoles investment strategies are predominantly based on apartments.
    Can we see the data relative to apartments to see if this has similar upside?
    Given the vast majority of apartment development is in inner suburbs and this development is virtually at epidemic levels, is there still upside in investing in inner suburb apartments?
    My own experience resulted in having to reduce my rent recently to attract a new tenant.
    My property is an inner suburb 2 bedroom apartment recommended to me by Metropole.
    The rent is still lower than projected by Metropole 4 years ago.
    Capital growth has been minimal over this time too. From 1 investor, not a great experience!


      September 19, 2015 Michael Yardney

      I’m not sure that a comparison of apartments would be as valuable as they are predominantly located int he inner and middle ring suburbs.
      But the concept that not all land is created equal (including the land under the apartment block) is still valid.
      Landlords in all locations have been experiencing all time lows for rental growth as explained here:
      https://propertyupdate.com.au/time-low-annual-national-rental-rates/ That’s just the stage of the property cycle we’re at.


    Avatar for Michael Yardney

    September 17, 2015 Gerard

    Thanks for this clear explanation Michael – I’ve been following your blogs for quite a few years now and you’ve stuck to the same message and it seems to have stood the test of time.
    Thenthere are those who try to come up with a new “hot spot” every few months and I’ve noticed how they’ve taken all their old predictions off their websites – all the mining towns and regional towns that have gone south.
    Keep up the great work


      September 17, 2015 Michael Yardney

      Thanks for the kind words Gerard. yes my property strategy may seem boring at times, but it’s stood the test of time


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