When we buy real estate, our goal is to buy an asset that ultimately grows in value.
There are a lot of different approaches to buying property and strategies like renovation and development that can add even more value. But at the end of the day, the quality of the asset and the location in which you buy it are the main factors that will determine how that property performs over a long period of time.
In recent years, we’ve started to see many of the smaller capital city markets perform well. Currently, Perth is seeing decent growth, with many new property investors flocking to try and buy into these cities. But I think they are doing themselves a disservice.
When I buy a property, the very first thing I want to know is how that area has performed over the long term. While prices might be rising for 12-24 months, that doesn’t mean that the long-term prospects of the area are all that good.
Let’s take Perth, for example. While prices might have risen and even held up through the market correction, if we zoom out, we can see some troubling numbers. Perth prices actually went backwards for over five years and only recently reclaimed their record-high prices from a decade earlier.
And while we know that not all locations in a city are going to perform in the same way, we still want to have some kind of wind at our backs when we buy a property.
Remember, a rising tide lifts all ships.
So when I look for areas, I want to see a history of strong price growth and then look closer for suburbs that have outperformed over a long period of time. This is what we see in many of the best areas of Sydney, like the Eastern Suburbs.
I always say that if an area has been growing for 40 years straight, then what are the odds that it’s just going to stop overnight?
In many ways, you’re taking a far bigger risk if you’re betting on a city or location that has not grown for 20 years to suddenly become hot and then continue growing for the next 20.
There are also fundamental reasons why places like Sydney will continue to outperform. We see the biggest immigration numbers in Sydney and Melbourne. There will always be more people coming to these places than anywhere else.
The good areas will also have similar levels of supply that they do now. This by itself is putting upward pressure on land values and on prices.
At the same time, population movements in places like Perth and Adelaide are not always strong. Perth’s population grows when mining is hot and crashes when it’s not. It mirrors property prices – something that will likely continue again in the future.
So when you are deciding where to invest, look at what history is telling us. We can’t predict the future, but we can make smart decisions based on what’s happened in the past.