One of the major trends we’ve experienced over the past few years has been broad-based property market growth.
Values have been increasing in both major capital cities, regional areas and across different segments of the market.
While this has been great for homeowners and investors at some point many of these locations are going to run out of growth potential. What I mean by that is that there will come a time when certain suburbs and locations will become too expensive for locals in that area to afford as their wages are simply not going to be able to keep up with the cost of living there.
This is likely going to be the case in many of the outer suburban areas and regional towns, where average wages are low and homeowners are typically going to be stretched with high mortgages.
When we look at locations around Sydney that are already experiencing some form of mortgage stress, we can see that it is generally the outskirts that are being most impacted.
This leads me to think about the classic real estate saying, “cheap today, cheap tomorrow” as it sums up why I always buy blue-chip properties.
When we look at the heatmap, we can see that the most affluent areas are the ones that are the least likely to be experiencing any form of mortgage or financial stress. Typically, the people that live in these areas have high paying jobs or run their own businesses.
Of course, the homes in these areas are more expensive, but the people who are looking to move there are able to afford them.
That’s why there is always going to be a steady stream of buyers for high-quality blue-chip locations as people always want to live in these suburbs. There’s also a lack of supply of new land which means those that do want to move there will have to continually pay higher prices.
Contrast this to what happens in the fringe suburbs of the city or regional areas. Generally speaking, these locations are far “cheaper”, than their inner-city counterparts, however, there’s a good reason for that.
Firstly, there is really no lack of supply at all. Over time, developers will keep on converting cow paddocks into new estates and those who have recently bought there will likely not see any meaningful capital growth.
At the same time, the wages of these buyers are going to be lower than average and given they are mostly going to be employees, increases will be few and far between.
For those reasons, there is virtually no upward pressure on prices from the demand side and unlimited supply. While these houses are cheap today, they will almost certainly be cheap tomorrow.
While a rising tide has lifted all boats during the most recent market cycle, in the long run, there’s a reason you want to invest in quality assets in blue-chip locations.