On the surface, most people understand why one property might be priced higher than another.
We all know that properties that are the most in-demand will generally be worth more than those where demand is lower. This is the most obvious when we compare properties that are located in the Eastern Suburbs of Sydney along the beach, with a home in a regional area of NSW. Same state, very different properties and wildly different prices.
Intuitively we know why this is the case, however, it’s important to break down the factors that are at play here as there are valuable lessons we can learn from an investment point of view.
Supply and Demand
Clearly, the beachside homes in Sydney’s premium blue-chip suburbs are ones that have some of the highest price tags.
Thinking about why this comes about is simple enough. In these areas, there are incredibly tight levels of supply. These homes sell less frequently and there are often few on the market.
In terms of the land the property might sit on, there is also a very limited supply. These are areas that are very old and well established. The reality is that even if you wanted to go out and buy some land to build on, there isn’t much if any available at all. Again, this is the type of scarcity that leads to prices increasing over a long period of time as there are always buyers and always limited supply. Regardless of the price.
Contrast this to many regional areas or even the outer suburbs of Sydney. In these types of areas, it’s not uncommon to be able to purchase vacant land or even buy homes in new subdivisions.
In these types of areas, there is virtually no supply issues whatsoever. For whatever reason, there is also a steady stream of buyers, often first home buyers, who pick up these properties. Unfortunately, many new buyers fall into the trap of buying into these types of areas where there are no supply shortages at all, and this often leads to the owners never really seeing any value uplift in the short or even medium term.
We always suggest buyers look to blue-chip suburbs first, depending on their personal situation, as these are the types of areas that have had a history of long term growth. These properties continue to outperform for a reason as demand will always outstrip supply.
Another key factor that sees the more expensive suburbs outperform and rarely fall in value is the fact that the types of buyers that live there can afford to do so.
This is most clear when we look at how the selling process generally plays out. The vendors in the expensive blue-chip suburbs will often look to sell only if they can get the price they want. The owners in these suburbs are often highly paid professionals or business owners who control their income.
For the most part, they are not under financial pressure to sell and short of a divorce or personal situation, they generally have a ‘take it or leave it’ approach. When a vendor has the upper hand in a property transaction, they will be able to hold out for the price they want and this also adds to the supply pressure as well.
It’s difficult to secure a premium home with a lot of competition at a significant discount for that reason. As an investor, that is not necessarily a bad thing, as it’s also important to think about what that might look like for you when the time comes to sell.
I would prefer to be buying a home that has steep competition, strong demand and low supply any day of the week, rather than grabbing a bargain because there was no buying interest on a home in a small town.
Premium homes and blue-chip suburbs are expensive for a reason. People want to live there and are prepared to pay for the privilege. As an investor that should be something, you’re looking at as well.